The headlines might read “10% off” at Amazon.com, Inc. (NASDAQ:AMZN), but investors might be wise to reconsider buying shares. Instead and if you’re interested in a real sale, look to AMZN stock’s options for credit and a really “prime” purchase. Let me explain.
Let’s face it, most of us love the convenience of shopping on Amazon. And maybe because of the excellent buying experience, you’re prone to legendary fund manager Peter Lynch’s philosophy of buying companies we use. I get it.
Having said that, don’t buy AMZN stock right now.
There’s little doubt that as a company, Amazon is here to stay and be a dominant force for both consumers and businesses alike. But that doesn’t make shares of Amazon a purchase.
In a yield-starved market, over the course of less than two years, shares of Amazon were up about 135% at recent highs. Moreover, since the lows of the financial crisis in 2009, AMZN stock has rallied nearly 2,300%. That’s incredible to say the least, but there may be a bigger problem than gravity for the ubiquitous tech giant.
Bottom line, with Amazon now consistently turning a profit and sporting a mega-size market cap and household presence that’s second-to-none; earnings misses and valuation may carry more significance with investors going forward.
And guess what? Following last week’s profit miss and a very lofty 175 Price-to-Earnings multiple; that day of reckoning may have begun in AMZN stock.
AMZN Stock Daily Chart
Two key trend lines in AMZN stock, defined by the 50-day simple moving average and what many traders accept as an institutional support line, have been broken. That’s technically bad news. Even worse, the moving trend line was subsequently tested and confirmed as resistance earlier this week.
Currently, AMZN stock has corrected by roughly 10% from its all-time-high near $846. No doubt that’s a market size correction without getting into the realm of bear market rhetoric. But for growth stocks such as Amazon, larger drawdowns up to the 30% area are common, even in healthy market environments.
Having said that and given our valuation concerns previously addressed, looking forward, I’d estimate a decline of 15% to 30% is not only possible, but more than likely forthcoming. Were such a move to play out, AMZN stock could trade down as low as the $600 area.
More optimistically but still down a ways, a 17% correction translates into a test of $700 before AMZN might find a footing worthy of an intermediate low in shares. Aside from being a psychological whole number, $700 also lines up with the prior highs and 38% year-to-date retracement level.
AMZN Stock Long Bull Put Spread
While I’d personally be more inclined to position short in AMZN, for investors looking to buy on weakness, the Dec $695 / $690 bull put spread is an interesting idea.
Priced for 55 cents mid-market with AMZN stock at $766, a return of 12% over the next several weeks is possible if AMZN stock fails to surrender another 9% for a total correction of 19% at expiration. That’s nice to think out in our opinion.
Also something to consider, for investors wanting to buy AMZN on weakness, a bull put vertical allows for this kind of opportunity, but with the authority of a definitive stop-loss during the life of the position.
Bottom line, should the investor’s enthusiasm wane were Amazon to trade lower, the most that could be lost would be $4.45, or roughly 0.6% of the current share price. And in the event of a more massive and maybe opportunistic sell-off to $600, buying AMZN stock for an effective price of $604.45 sounds and looks like a more “prime” purchase.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
