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.
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
