I was clearly far too early in restarting a pairs trade short Microsoft (MSFT) and long Intel (INTC). Over the past two months, the performance of MSFT has steadily improved, while Intel’s performance has steadily worsened. The MSFT/INTC ratio is now at 10 month highs.
Source: stockcharts.com
Typically, I would look at this divergence and start planning for a turn toward the bottom of the range. However, catalysts remain that could drive the performance divergence to the top of the multi-year range before this move finishes. Microsoft is generating excitement with its Xbox 360 Kinect. The stock broke out on Thursday on strong volume, presumably in reaction to Steve Ballmer’s keynote at the 2011 Consumer Electronics Show (CES). MSFT is also somewhat of a “value play” for 2011 given its severe under-performance in 2010 (a decline of 8.5%).
Meanwhile, Intel is back into its “can’t get no love” funk. Analysts like Piper Jaffray have downgraded INTC, and there are concerns that INTC will be a loser in the “tablet wars.” Intel’s stock is sagging, and this week INTC experienced a critical breakdown below the 50 and 200-day moving averages (DMAs) on high selling volume.
*Last two charts created using TeleChart:
Given all this, I am not motivated to make another play for a return to the bottom of the range on relative stock performance. Since, I am not interested in shorting INTC or going long MSFT, I will be “standing down” on this trade until catalysts become more favorable to the setup I want (like a move to the top of the multi-year trading range).
Be careful out there!
Full disclosure: marginal value puts in MSFT and calls in INTC (effectively, no positions!)