It’s not often that I start my day making a bear case (I’m a Raging Bull, after all) and it sure isn’t typical of me to turn pessimistic on one of the strongest and biggest names out there…
I prefer to follow the trend, not fight it.
If a stock goes up – I’d much rather join for the ride vs. look for a top and believe it’s up too much.
I’d only go bearish on a strong name if it gives me solid reasons to do so – and this brings me to Amazon (AMZN).
The closer I’ve looked at the name over the last week, the more unnerving, in my view, the price action has become.
I think Amazon stock may be due for a bigger and sharper pullback and here’s why…
A couple of weeks ago, I mentioned Amazon when I discussed the notable weakness in FAANG names…
At that point, the stock was getting hammered having missed on Q2 revenue and Q3 revenue guidance, even despite a solid EPS beat. Here’re the actual numbers:
- EPS $15.12 vs consensus of $12.2
- Revenues $113.1B vs consensus of $115.4B
- Q3 Revenue Guidance $106B-$112B vs consensus of $118.72
Saying that investors weren’t impressed by the last 2 points would be an understatement – shares closed nearly 9% lower that day, having completely destroyed what looked like a consolidation higher.
AMZN has fallen victim to what most “hot” stocks usually become the victims of – extremely high expectations.
The shares have always been priced at a solid premium to “regular” names, accounting for growth prospects – and growth it has delivered.
The already booming business then got another huge boost in 2020, as the company might’ve been the single biggest beneficiary of the COVID-19 lockdowns – virtually all of the shopping went online, sales grew at a record pace and the shares have gained nearly 80% that year alone.
And here’s the caveat: AMZN remained at the highs and actually tried moving higher throughout 2021, continuing to price in high growth expectations – albeit this time in a very different market environment.
Thus, a miss on revenues and guidance served as a rude awakening to many, who believed the growth story would continue forever.
Times Have Changed
Having been so comfortable in Amazon for such a long time, the market participants seem to have forgotten a few things with the biggest one being the pandemic is easing up!
The primary driver of last year’s growth was the fact that the world was literally “forced” to buy off Amazon and its competitors.
And while coronavirus concerns persist, the world is clearly a very different place now vs. what it was at this time of last year: consumers have a lot more options and an argument can be even made some will actively avoid Amazon just to go shop outdoors.
With “COVID-boost” out of the picture, AMZN still remains a tremendous company with a great growth story, but there’s clearly an argument to be made that the full-on pandemic valuation is no longer justified – revenue hiccups only serve to prove the point.
AMZN is Weak
Here’s the part that grabbed my attention the most over the past few weeks: AMZN has truly been relatively weak compared to the market and its peers.
The big guys are definitely taking a more cautious approach, and this is something to note.
Referring back to that same piece I wrote on FAANG names, I made a point that they all sold off on earnings and showed momentary weakness.
Well, let’s have another look now, some 2.5 weeks later. Here’s Facebook (FB):
It’s selling off today, but overall above the earnings drop and still in a clean uptrend.
Here’s Netflix (NFLX):
Not doing much, but again, holding up, still making a decision.
Here’s Apple (AAPL):
At the highs, actually.
I won’t be showing GOOGL, as it was the only name to not really sell-off, following Q2 numbers.
Last, but not least, let’s have a look at the mother market itself, here’s the SPY chart:
At the highs, as well.
And here comes Amazon itself:
Despite the strength in every corner of the market, AMZN remains in a gradual meltdown after earnings with seemingly no end in sight.
How Do I Plan to Trade It?
For some, it truly is a billion-dollar question.
Given the disappointing outlook and the stock’s current position, I see no reason to be bullish on Amazon in the near term, unless a positive catalyst comes out or the price action stabilized and begins to show strength again.
If you look at a bigger picture chart, AMZN has 2 key support areas insight: at $3200 and at $2900.
We’re nearing the $3200 level – if it can’t bounce from here, I think we can easily see a slide into $2900 and potentially lower than that.
My plan is to watch what the stock does at $3200 in the near term and position myself bearish if no meaningful bounce happens.
One way to express this sentiment is to enter a bear call spread, I’m currently looking at the following contracts:
- Sell a Sept 3rd 3200 CALL for ~$83
- Buy a Sept 3rd 3280 CALL for ~$44