At $1,000/share, the sky’s the limit for Amazon

Last week, Amazon (AMZN) shares busted through $1,000. The odds are good they will keep going.

Amazon is a great business. Arguably, revolutionary. However, its share price has always been driven by psychology. Pushing through the $1,000 barrier will likely put this on full display.

We like to think markets are rational. The truth is they are driven by humans. And humans are guided by predictable emotions.

It’s an idea fully exploited by Jesse Livermore, the legendary speculator. He observed that when stocks passed round-number milestones like 100, 200, 300 etc., they usually had predictable, often violent, follow-through rallies.

We tend to place too much importance on milestones, don’t you think?

When a stock nears such a watershed, sellers bunch up. They think it’s a good place to take profits. And short-sellers think it’s an opportunity to pounce. A rally beyond the milestone means sellers have been exhausted. It creates a vacuum.

Wall Street laughed when Amazon began investing in massive warehouses. Now the Street understands the method behind Amazon’s seeming madness.

Amazon has always attracted doubters. For years, founder Jeff Bezos was willing to forsake profits as he built out infrastructure. Massive warehouses teeming with expensive, bespoke robots and a global web of data centers all seemed completely out of scale with his little online bookstore.

But as the full scope of Bezos’ vision became clearer, the stock rallied. Its $487 billion market capitalization now twice the size of Wal-Mart (WMT), despite having only one-third the sales.

Analysts believe Amazon is better equipped to keep winning at online retail, given its early infrastructure investments.

It’s also in a position to win at public cloud computing, a potential $1 trillion business that did not even exist when Amazon was born in 1994.

And that brings me back to the $1,000 milestone. Despite all of Amazon’s success, and potential, many still believe the stock is hopelessly overpriced. Last October, CNBC reported short-interest had risen to $5.3 billion worth of stock. Since then shares are up $177, or 21.4%.

In April, Amazon shares pushed through $900. Five weeks later, they are above $1,000.

In my view, it’s deserving. No other company in the world has made itself a platform, or become the center point, for virtually every swelling social and business trend: the cloud, artificial intelligence, online sales and the redefinition of cash.

Livermore made it his mission to understand investor psychology and to use it to his full advantage. The book Reminiscences of a Stock Operator, the 1923 dramatization of his life, is considered the go-to source for understanding markets, price and speculation.

The Amazon stock-price narrative sits at the nexus of so many Livermore axioms. There is the idea of pivotal, round numbers. There is the idea stocks should be held as long as their price is rising and the market remains in an uptrend. There is the idea stocks should never be sold short simply because they have risen a lot.

In fact, the greatest accelerant for Amazon shares might be the continual flow of anxious short-sellers covering, or buying back, their wayward positions.

Understanding and implementing Livermore’s axioms is something I take very seriously. It’s part of the service I provide to my members.

It’s difficult to find great companies with innovative, durable business models. It’s even more difficult to hold them when their share price has risen substantially. Taking profits is easy to do, but often unwise.

I help my members understand when and why they should resist temptation, and avoid a rounding error.

Best wishes,

Jon Markman

 

Leave a Reply

Your email address will not be published. Required fields are marked *

Comments 6

  1. barry stanley June 5, 2017

    Jon
    you have not answered my question re. Amazon: I am not able to find the answer on the internet either.
    question – In the event of a crash, such as that of 2008, what do you think would be the consequences for Amazon relative to similar stocks.

    Reply

  2. David Baskett June 5, 2017

    Do you get Royalties or something from “Reminiscences of a Stock Operator”? I’ve never seen so many mentions by anyone else even when Larry Edelson was plugging his own books!

    Reply

  3. Capt. Jeff Hathorn June 6, 2017

    I sold Amazon yesterday. I believe we are going to see the market drop. There is no starch in this shirt to hold it up. I plan to jump back in after a Labor Day. We will see! I am selling my Hancock leveraged funds ( HTD, HPI, PDT) for a locked in very good gain too. Same deal- I plan to jump back into them and good oil div stocks in the fall.

    Reply

  4. Tim June 6, 2017

    As long as the greater fool theory is in place, Amazon could certainly go higher. I would rather get my teeth drilled once a week than put one dollar into Amazon, Apple or any of these ridiculously over priced stocks. We live in an artificial market where the Central Banks are forcing bubble after bubble in certain asset classes. The problem is people are being forced into assets similar to Pokemon, Tulip Bubbles etc…

    We will look back at this period in history saying, “what were people thinking?” Today you can buy a small business that has a great track record of profits and only pay 1 or 2 times net earnings. Meanwhile Wall Street thinks paying 20, 30, 40, 50 or 100 times earnings is a good deal because Apple, Amazon, Facebook, etc are growing.

    The greatest quote ever which is so relevant here is “markets can stay irrational longer than you can remain solvent”. Good luck!

    Reply

  5. Will June 6, 2017

    Malls need that key retailer to draw customers to the mall, and so do all the small shops and food stalls scattered throughout the mall. When malls close jobs are lost. When jobs are lost people go on unemployment, at least for a while. Robots and machines will not be placing orders with Amazon. Could Amazon be just another black swan on the horizon?

    Reply

  6. David Bennett June 10, 2017

    AMZN, monthly up geometric percent fractal price target is 981.00 up to 1018.00,,, also COMPQ index ran up against custom designed Fibonacci line (.618) just above 6300.00, these fib lines were placed inside the target area based on top of target/bottom and according to 21 years and 10,000+ hrs to build, design and test the fractals. I will have to dispute your hunch AMZN will just continue to aimlessly go up. It will take a pause here and Friday was the start.
    There are chart snap shots but this foment box will not permit attachment,,, so…..

    Reply