What the “Microsoft Indicator” Says Now

Microsoft the Best Market Indicator at This TimeEarnings estimates for Microsoft Corporation (MSFT) are going up and the stock, which recently accelerated, finally looks like it has broken out of a 13-year consolidation.

Microsoft has been an income play for quite a while. Currently yielding three percent, the company’s forward price-to-earnings ratio is around 12.5 and is not dissimilar from many other blue chips.

Then there’s Intel Corporation (INTC). This company has been struggling for capital gains, but it’s yielding 3.6% and isn’t expensively priced.

What these technology companies illustrate so well is the business cycle, both in terms of operational growth and also as equity securities. Getting the cycle correct (the right place/stock at the right time) is the toughest thing for any investor or businessperson.

Regarding stocks, both Microsoft and Intel’s long-term charts clearly show how extremely overpriced their share prices were during the bull market of the 90s. Intel’s long-term stock chart is featured below:

INTC Intel Corp. Nasdaq GS Chart

Chart courtesy of www.StockCharts.com

The benefit of the very long term is that it provides a normalized but still decent rate of return with these kinds of stocks. No enterprise or investor can escape the business cycle, whether it is industry-specific, a local reality, or the general economy.

Railroad stocks have been super hot over the last several years, but for long periods of time, they were not. The solid dividend-payers that they are, you’d be hard-pressed to find Union Pacific Corporation (UNP) competing with Apple Inc. (AAPL) or Google Inc. (GOOG) for headlines.

I feel that stocks have broken out of their previous consolidation phase in favor of a new long-term cycle. But while last year’s stunning price performance was Fed-induced, it doesn’t mean that stocks won’t experience a material correction and even a technical recession in the economy all within the context of a bull market.

With speculative fervor somewhat diminished, especially with initial public offerings (IPOs), I think it’s time for investors to consider taking some money off the table with their more speculative holdings.

If Microsoft is doing well, that’s great; but former stock market darlings bouncing off new highs are a sign, albeit perhaps a subtle one.

Trying to figure out and bet on where the business cycle is at (from the investor’s perspective) is frustratingly difficult when the Federal Reserve is still so highly accommodative to capital markets.

Controlled price inflation is the long-term goal of central banks in Western economies, but the Federal Reserve’s scope is still so massive that trying to figure out where stocks will go next is virtually impossible, as monetary intervention usurps everything.

Stocks are trading right near their highs and the NASDAQ Composite is still outperforming relative to the other major indices. (See “If This Indicator Turns, the Stock Market’s in Trouble…”) But trading action is long in the tooth; stocks are due for a break, and this is especially the case with the market’s biggest winners, which now include companies like Microsoft.

Dividend-paying blue chips are holds as usual. Stocks may very well have another positive year, but investment risk is going up because of the price action. You can’t predict the future, but speculative positions are due for a haircut.