Why You Shouldn’t Buy Amazon

 

During the opening hours of trading yesterday morning, Amazon (NASDAQ: AMZN) briefly touched $1 trillion in market cap before retreating back down – setting a new 52-week high and leaving Apple (NASDAQ: AAPL) all by itself in the $1 trillion club.

The price of AMZN rose rapidly immediately after the market opened, running up to a daily high of $2,050.50 per share. The stock only needed to be worth $2,050.27 in order to achieve a market cap of $1 trillion, and it almost looked like it would hold its ground. However, by the end of the day, Amazon shares closed at $2,039.51, just shy of the high-water mark.

Analysts cite the company’s increasingly diverse portfolio (including the purchase of Whole Foods Markets last year), investment into new hardware developments, and exploration of the advertising space as reasons for Amazon’s recent surge.

Loup Ventures’ Gene Munster appeared on CNBC’s “Squawk Alley” yesterday, and had the following to say about the whole ordeal:

“They have given investors confidence that they can go and disrupt markets just like they’ve done with retail.”

This is all great stuff, and what investors wanted to see from Jeff Bezos’s mega-corporation. After all, they’ve enjoyed great success in retail, and managed to become a dominant force in cloud storage/computing/services shortly after entering that market.

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So what’s stopping them from doing the same elsewhere?

If you’re of the belief that Amazon will continue to gobble up industries one after another, then it absolutely makes sense to buy-in now before the stock price blows up even further.

And as good as that all sounds, it might actually be wiser here as a non-AMZN-holder to look before you leap. Don’t forget – buying in at all-time highs is usually never a good idea, and after examining a daily Amazon chart produced by our analysts, I think you’ll come to the same conclusion that I did:

 

On this daily candlestick chart of AMZN, you can clearly see that the stock price hit the upper limit of the Bollinger Bands (a set of lines plotted two standard deviations, both positively and negatively, away from a simple moving average of the security’s price) three times since early August.

The first two times it happened, Amazon sold-off for several days before continuing back up.

It just happened again a few days’ worth of trading ago, and as of yesterday the price per share has far exceeded the upper limit of the Bollinger Bands – indicating that we could be in store for a dramatic short-term correction back down.

Now, I’m not making any sort of argument here that Amazon is overvalued. If you’ve read any of my past commentaries on Amazon’s business practices, you’d know that I hold them in the highest regard. Led by superstar CEO Jeff Bezos, they’ve managed to offer value to customers like no other corporation ever before, and in the process asserted themselves in a near monopolistic position – all while the competition (and politicians) failed to stop them, despite trying their hardest.

However, what I am trying to say is that Amazon stock, as great as it’s doing (and will likely continue to do), may have risen too quickly. As a result, the inevitable sell-off could be quite large.

Everyone and their mother is extoling the virtues of Jeff Bezos and his company on TV right now – do you think that means it’s a good idea to get involved if you haven’t already done so?

Probably not.

So, before you make any major decisions, please consider what has transpired on the chart above over the last month, and how hitting the upper Bollinger Band for the third time in a row could result in a short-term sell off.

Once that has happened, an opportunity to buy-in a lower price could present itself once everything has had a chance to cool off.

And who wants to pay full price for something when they can get it for a bargain just a few days later?

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