To great fanfare, Amazon’s value surpassed $1 trillion on September 4. Since then, Amazon’s market cap has come back to $934 billion, a loss of more than 6%. Eventhough it is still way up from its 52 week low, we are debating whether this a big enough dip to buy the stock. Just as the best poker players win by reading other player’s “tells,” Wayne Himelsein, one of my managers, evaluates the market’s “tells” to determine when to be aggressive and when to hang back. Have you been waiting to buy some Amazon? Wayne says he is ready to buy a little.
Ken Kam: Wayne, is Amazon’s downside move a short term pullback that constitutes a buying opportunity, or is it a turning point, and time to start selling.
Wayne Himelsein: Quite honestly, there is no perfectly right answer as to what it is, as these are the potential “tipping points” that fall well into the underpinnings of chaos theory. But there are sometimes indications, or “tells”, from which we can try build reasoned forecasts, and then next to those, there are money management rules by which we should act in the event our forecast does not pan out.
Kam: So what, if anything, are you seeing in the likes of one of the greatest stocks of all time, AMZN?
Himelsein: The uptrend has been like no other, powering through new highs to an almost vertical existence, as if almost nothing could -- or would -- go wrong. Investor’s expectations are literally pristine, as are the capital gains built into their accounts based on however long ago their expectations initiated.
Even the February correction barely bothered Amazon. When the S&P500 made closing levels down 4% on the year, AMZN’s worst close over that period was still up 13% on the year.
More so, the S&P500 took till August to make new high’s, while AMZN did so in that very same month of February.
Its relative strength, or more aptly, investor demand to own one of the greatest companies in the world in spite of the market’s bigger problems, was clear, and superb.
Kam: So what’s happening recently, where since the high of $2050 made in the first few days of September, AMZN has since been dwindling downard? AMZN has in fact declined about 6% this month, while the S&P has gained almost 1%.
Himelsein: Looking at the days of this month more granularly, 9 out of 14 trading days have been down, where only 6 of the 14 were negative for the S&P500, making positive days the minority for AMZN vs. the majority for the market. To say the least, this is quite unlike Amazon’s past behavior .
All we can see, for certain, is how the stock is behaving, so the question becomes, what can one make of this behavior?
The large scale overwhelming time-tested and established wisdom speaks loudly: the trend is your friend, and or more mathematically, larger time scales overweight smaller ones. A 15 day “dip” should be far underweighted vs. a multi-year climb.
This is the wisdom because this is the norm. For that reason, I would be inclined to see the dip as an opportunity and be a buyer down to the 1900 level.
Kam: Forgive me, but I don’t hear a lot of conviction in your recommendation. You have not bought any for your Marketocracy clients. What’s keeping you from pulling the trigger?
Himelsein: I haven’t bought any yet because I see some signs of caution. If we step outside of the very recent lagging behavior, with a wide angle lens that sees not just this month, but this whole year, we identify “accelerations,” or a few spurts of rapid increase that demonstrate curvature, like rockets propelling to the moon.
Just last month, starting in mid-August, there was an accelerating upward climb that looked like it could literally launch a wheeled vehicle to a skybound plateau; the very edge of which was the highest high of 2050 that we saw on the first trading day in September.
I sometimes refer to these acceleration moves as “parabolics” because they do exactly that with the price. Stepping out, we see two more of these this year, one in mid-May that peaked in early June, and another in early July that peaked in mid July.
These are not signs of a stock “steadily climbing” but rather “accelerating up the ramp”, which can be a sign of topping. Like a runner who sprints too hard for the last 20 meters, they exhaust themselves and collapse as soon as they get past the finish line.
Kam: Is it possible that Amazon has been the hottest stock for so long that it’s now overheated?
Himelsein: It may just be. At the same time, we are talking about one of the greatest growth stocks of all time.
Thus, in order to ideally manage the competing views of riding the trend versus an exhausted stock seeing a top, I would recommend being cautious, perhaps by buying the dip, but less than you normally would after a AMZN dip. Maybe half a traditionally comfortable position.
Kam: So you reconcile the competing views by buying half of the position you would normally buy after a 6% dip. What would you need to see to make you feel more confident one way or the other?
Himelsein: If you see Amazon drop below 1900, I would start to take some off the table until lower levels.
It is not at all that the stock is likely heading for any sort of doom scenario, only that it may have run too far, too fast, and needs to take a breather.
Kam: Amazon closed at $1,915 on Friday so that doesn’t leave to much room to fall before you would be selling. Perhaps it would be better to wait until we see if the stock falls a little lower. If that happens, at what point would be you be a buyer with conviction?
Himelsein: I’d be a buyer closer to the 1700’s, and even more in the 1600’s, because it has a powerful long term trend, and it is a great company poised for global dominance.
But that does not mean we should sit around and be tossed about as it shakes off its overdone stance. And it does end up brushing off the heat and moving onward and upward.
If we buy a half position now, we will participate in the strong, longer uptrend, but just not as much as we would have had we been less cautious and bought the dip just like we always do.
My Take: Wayne likes to say “the best investments are the ones the rise quickly after you make the purchase even if you didn’t buy at the low.” Even though Amazon has is far above its low for this year, it can still be a good buy.
Wayne’s Logica Focus Fund (LFF) has a 17+ year track record at Marketocracy. Over that period, Wayne's model averaged 13.41% a year which compares well to the S&P 500's 6.11% return for the same period.
Because LFF consists of large-cap, liquid stocks, the S&P 500 is an appropriate benchmark. For those who aim for the lowest fees, an index fund is hard to beat. But for those who aim for the highest return after all fees, LFF has been a better choice for years.
For the full Forbes.com article, please click here.