Morning Market Thoughts
Good morning. If you own LNKD, my salutation is “Awesome morning!!” Microsoft (MSFT) is buying LinkedIn (LNKD) for $196/share, which is back at early February levels, just prior to their precipitous drop following their Q4 earnings report. See — gaps do tend to get filled…just not in one day.The stock chart will now show what is called an “Island Reversal”. This pattern is formed when a stock gaps way down (or up), and then trades there for an extended period of time. (The definition of “extended” can be whatever you want it to be). The resulting gap is typically a result of a big surprise in earnings — either lousy, or great. Finally, something happens that causes the stock to gap back up (or down) to levels not seen since before the first gap. The result is a series of prices surrounded by gaps — an island of prices. Gaps after island reversals tend not to get filled, and that will be the case here.
The offer is for $196/share. Don’t expect LNKD to trade much loser than that. If the stock trades lower, it’s because traders do not believe the deal will go through. If the stock trades much higher than $196, it will be because traders (i.e., the market) think that there might be a competing bid for LNKD at an even higher price.
This is a smart deal. When the Fed makes money so cheap that large investors have to pay someone to hold it for them (a little bit like renting a storage unit to hold all the crap that you can’t seem to part with, but that will ultimately be thrown away or donated for a receipt that can be used to reduce your taxes), it make sense to use that money to buy something that’s worth something. This is a good deal for MSFT, and it is probably a buy if it falls close to $49 (seems like it’ll do that at the open this morning). The $49 level is a key level because it is (1) slightly below the 200-day moving average, which has been holding since February, (2) prior resistance since November 2014, when the stock gapped away from that level, going from $49 – $52, (3) the bottom of that $49-$52 gap, and (4) a level that has been tested three times since the October gap the bottom of the $49-$52 gap last October (3) reported been tested three times since the October gap.
So if MSFT holds at $49, you’ll have a chance to buy it at a favorable price. Now…….whether you WANT to buy MSFT is a different story. Don’t buy it because it’s a shiny object. Only buy it if you’ve been wanting to buy the stock for a while (look at the weekly chart and you can easily make a case for owning MSFT).
Away from MSFT, the markets are set for a lower open this morning. On Wednesday, the Fed will announce that they will not be hiking rates, but that they are watching the data closely, and expect the data to improve, thus reinforcing the Fed’s belief that the economy is on a steady path of improvement. The statement will say that the Fed remains optimistic that they will be able to raise sometime over the next few months, but that the Brexit vote on June 23rd (which has apparently just made it on to the Fed’s calendar since they never mentioned it until recently) presents risks that must be monitored.
Expect the market to rally on this news, unless it does so today and tomorrow.
And as for what the market does when the Brexit votes are tallied? If the Brits vote to exit the EU, we will see the wheels come off the wagon in ways you haven’t seen since Ben-Hur. If the Brits vote to stay, you’ll see a rally in global markets. I rarely “predict” price activity. But the Brexit dynamics are pretty obvious. At last tally, those who wanted to leave the EU are at 55%. Close. But in my personal opinion, the real global powers who like to stay in the shadows and rub elbows at Bilderberg each year will never let this happen. One way or another, the Brits will vote to stay in the EU, even if it means that some of the votes got magically lost, dead people rose from their graves to vote, or some other voting “irregularity” that is impossible to pin down. I just don’t see the banks, the power brokers, and other governments who benefit from the United States of Europe allowing one of the members who are propping up the EU to simply take their ball and go home. Personally, I just don’t think this will happen. Am I being cynical? Um, duh.
Anyway, be careful about making big commitments to stocks this week. Summertime volume is light, and volatility tends to be higher than usual. That can be good or bad, depending on your trading style and experience.
See you in the forum.
Dan
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