Microsoft and its Peers

In the last week of December 1999, Microsoft (MSFT) crested after a magnificent decade. It was the largest company in the world as the dot-com boom raged. Its performance that year helped the Nasdaq 100 achieve a 101% gain. Discussion in the tech world then was not the potential for a burst bubble, but whether computing systems worldwide could handle the Y2K bug.

Stocks survived the Y2K bug but not the tech bubble, as a year later Microsoft’s stock had fallen more than 60%. And even after the rest of the market ultimately picked itself up and dusted itself off in a bull market from 2003-07, Microsoft barely recovered, only to be hit again during the great financial crisis.

Click image for larger view

Once stocks began to recover from the 2008-09 bear market, Microsoft once again was slow to recover. But once the old management regime was swept out, and new faces took over in 2013 and 2014, the company’s fortunes and shares finally recovered. Since 2013, in fact, Mister Softee’s shares have been among the strongest in the Nasdaq, and after a sensational earnings report Thursday, the stock has finally managed to hit new all-time highs. It took a long time, but people who held on for 16 years are finally in the black again.

Click image for larger view

Bespoke Investment Group analysts note that when Microsoft was last at its all-time high, its market cap was just over $600 billion. Due to the company buying back its own stock over the years, its market cap is not making a new all-time high today along with its stock price. In fact, the analysts observe, Microsoft’s market cap is about $200 billion less than it was when it last peaked at the end of 1999!

While not all stock buybacks work out so well, the analysts point out, Microsoft’s purchases came mostly between 2004 and 2013, when the stock was viewed as “dead money” by most. Well done.

* * *

Catch Your Breadth

And now a word from quant-land about a very curious thing.

Jason Goepfert of Sundial Capital reports that even as the Nasdaq 100 ($NDX) hit a new high early last week, not many stocks are going along for the ride. He reports that when the index was hitting highs on Nov. 2 and Nov. 3, barely 60% of stocks in the index were even above their 200-day moving averages. That’s one of the lowest readings in 14 years, next to October 2007 and July 2015, which proved to be poor times to expect those new highs to hold.

Since 2001, the only times that saw fewer stocks in a bull market when the Nasdaq 100 was hitting a new high were Oct. 30, 2007 (61%) and July 20, 2015 (59%). A month later, the NDX was lower by 4.8% and 2.9%, respectively. And of course that date in 2007 will live in infamy as the top of the 2003-07 bull market, after which unraveled the great financial crisis.

In 2005, 2006 and 2010 a similar divergence didn’t lead to anything negative for the Nasdaq as its benchmark index kept plowing higher. But six other times such a divergence occurred, the index suffered some damage over the next three to six months with losses greater than 5% each time, according to Goepfert.

He notes that this is a difficult situation to analyze. On the positive side, we know markets that switch rapidly from oversold to overbought tend to see further gains. On the negative side, participation in the move this time has been lackluster to a historic degree, he reports. There is no easy way to reconcile that except to acknowledge it and beware.

* * *

New Energy Bull Market?

Bespoke Investment Group analysts point out that it’s fair to argue that a new bull market for energy stocks has begun.

Click image for larger view

After a nasty 41% decline over 60 weeks from June 2014 through August 2015, the SPDR Energy (XLE) began a new bull market after crossing the 20% gain threshold today. (Bull markets are defined as a 20%+ rally that was preceded by a 20%+ decline.)

Now that XLE has broken its downtrend and formed a new bull market, what does the normal “bull” look like for the sector? Below is a Bespoke-created table highlighting bull and bear markets for energy over the last 35 years. There have been nine bull markets and eight bear markets for energy stocks over this span, with the median bull lasting 888 calendar days and a median gain of 65.3%. The median bear has lasted just 127 calendar days with a median decline of 27.5%.

The last bear was one of the most extreme on record with a decline of 41.3% over 428 calendar days. The current bull has seen a gain of 21.3% so far over a 70 calendar day period, and with the downtrend just now broken, you can expect more gains to come through year end.

Best wishes,

Jon Markman