In my 30-plus years in the stock market, the one big mistake I have seen investors make over and over is that they think a company’s stock and how the company is doing are the same thing. This is especially applicable to investors in Amazon.com stock at this time.
Shares of Amazon AMZN, +0.47% rose after the company announced its second-quarter results. In part, this was a relief rally as there were some fears of Amazon disappointing the way Facebook FB, -0.74% did. Please see “How low will Facebook’s stock fall before it rebounds to more than $300?”
The chartPlease click here for the annotated chart of Amazon stock. Please observe the following from the chart:
• The stock price is over $250 above the trend line. Such over-performance often leads to a short-term pullback when no one is expecting a pullback.
• RSI is supportive of a further rise but is overbought. This again indicates potential for a short-term pullback in a long-term uptrend.
• A large number of investors appreciated the overshoot shown in the Facebook chart recently published. It is important for investors to understand the overshoot because it often retraces. The overshoot on Amazon is shown on the chart. A retracement of the overshoot will bring Amazon’s shares to the $1,600 range.
• The chart shows the next target for Amazon to be $2,100. This is determined based on the quantitative screen of the ZYX Change Method.
• Amazon continues to outperform other popular tech stocks such as Apple AAPL, -1.70% Netflix NFLX, -2.18% Alphabet GOOG, -2.40% GOOGL, -2.57% Nvidia NVDA, -1.15% and Microsoft MSFT, -1.82%
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Ignore the analystsThere are many intelligent analysts, and their reports are usually helpful. However, carefully review the history of analysts’ reports on Amazon. You will reach a conclusion that, lately, some analysts look at Amazon’s stock-price momentum and then come up with justifications shrouded in fundamentals and fancy numbers. After all, what choice do analysts have?
When the stock moves up, they have to move their target. Considering the big move in the stock, it is best to ignore most analysts and simply pay attention to the chart at this time. As a note of caution, this recommendation is limited to Amazon stock at this time. For most companies, it is better to pay attention to fundamentals and the chart as well as to the analysts. In the future, a time may come when Amazon’s fundamentals may again become important.
It’s given that Amazon has strong fundamentals. There is nothing to be gained by focusing on them other than generating fancy reports.
Don’t make this mistakeIn growth companies such as Amazon, it is common for the stock price to run ahead of the fundamentals in terms of valuation. When the stock becomes popular and everyone who wants to own it already owns it, the driving factors become sentiment and momentum. This is the reason that at this time investors’ focus should be on momentum. Sentiment drives momentum. Consider avoiding the mistake of thinking Amazon’s stock is the same as company’s fundamentals.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
