I have a deep interest in investment psychology and market sentiment, so I thought that this article from MarketWatch on Amazon (NASDAQ:AMZN) was extremely interesting back before Amazon stock’s earnings report.
As someone who has been in the institutional investment industry for more than 20 years, I’ve been around the block more times than I care to remember, and I don’t recall seeing anything like this since the technology bubble back in the 1990s.
According to the article, there are 45 analysts at Wall Street brokerage firms that research and analyze . Every single one of them has a buy recommendation on Amazon stock. I find this to be incredible.
Now it’s important to remember that Wall Street firms do not like to make companies look bad. Suppose a company needs the services of a brokerage firm. It is unlikely that they would go to one that is recommending that its clients should sell the stock, so there is an inherent bias in “sell” and “buy” recommendations. That being said, this example with AMZN is ridiculous.
Amazon Stock and the Mathematics of Massive Bullishness
Now I see that Russell Wilson, the quarterback of the Seattle Seahawks, has given AMZN stock as a gift to some other players on the team. If this isn’t a sign of excessive Bullishness then I don’t know what it. This kind of reminds me of how celebrities were endorsing cryptocurrencies last year. Remember when people such as Paris Hilton and Ashton Kutcher were getting on the Crypto bandwagon? I think it is safe to say that their investments probably didn’t work out so well.
It is important to understand sentiment. If you do, you can gain valuable insight into the dynamics of market tops or bottoms. Think about this. Suppose there are a total of 100 investors in the entire world and everyone of them is bullish on company XYZ. That means every one of these 100 investors has invested all of their available funds XYZ stock. Now there are no more buyers! This means that the price of the stock will not go any higher.
Remember, investors only buy for stocks for one reason — because they believe they will go higher. This decision to buy is a choice. Nobody needs to buy a stock.
On the other hand, sometimes investors need to raise cash so they are forced to sell. It is not a choice. They may need money for things like college tuitions, mortgages, or bailing their delinquent kid out of jail. So it is inevitable that some of these 100 investors will eventually be selling.
Because all of the buyers have full positions there is no one left to buy this stock. This means that this selling will cause the price to fall. Obviously, this is an extremely simplified example but it illustrates an important dynamic. Markets form tops and go lower because they have run out of buyers. Markets form bottoms and go higher because they have run out of sellers.
I am not suggesting that Amazon stock is about to head lower, but if I had a position in it I would certainly pay attention to these sentiment dynamics.
As of this writing, Mark Putrino did not hold a position in AMZN.
