Heyer Capital, LLC

investment management and timely advice from a local CPA (Fox Valley, Wisc.)

Amazon – the River of Trickling Returns

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Amazon has gotten quite the well-deserved knock over the yearsof being a sinkhole of hopes and capital instead of a fountainhead of profits. Lately they seem to have decided to stop pouring cash into developing broad new product lines and, well, sell stuff profitably. In Q1 they smashed Wall Street’s consensus earnings estimates, and the stock leapt $18 the next day. Why such a big move?

Allow me to hypothesize that the big move was due to “the shorts.” Yes, those evil, foul, anti-American, pessimists who profit when a stock falls in value. (I say the above in jest, of course. A market must function fluidly in both directions.) For the past six month, the number of Amazon shares that had been shorted rose to where it would take ten days of average volume to buy back all the shares that had been shorted.

A bit of an aside about shorting. A short investor must borrow shares from his broker (who in turn gets the shares from someone’s margin hypothecated margin account). Those borrowed shares are sold at the market, generating cash for the short investor. If the shares fall in value over time, he can buy back shares and return them to the broker. Because he sold first, and then bought shares back at a lower price, he earns a profit. IF the shares had moved higher in price, he would have to buy them back at a higher price, losing money. Hence the big move in Amazon….

When Amazon reported such a huge turn in profits, Wall Street realized the company’s outlook had changed and many shorts had to re-evaluate their risk-reward stance. That and the trading desk manager started screaming on the floor, “Who is the #@$@#$ that is still short @#$#@$ shares of @#$@#$%$#@ Amazon. We’re losing our @#$@$#@$ shirt here! Cover these @#$@#$@#$ or else some unlucky @#$@#$@#$ is going to get their @#$@#$@# fired by ten o’clock.”

That’s why Amazon opened nine dollars higher and moved higher all day. Investors who had owned Amazon offerred their shares at these higher price, but the demand for shares was greater. It took an increasingly higher price to entice more shares to the market. The buying pressure even continued the next day, as the stock opened about where it closed and pushed $6 higher and closed near its highs for the day.

Amazon - the River of No Returns

Now, the $64,000 question: how could you make money with this? Could you have seen it coming? We have the benefit of retrospection, of course. Let’s learn from this.

Amazon had a low EPS rank from Investor’s Business Daily before their earnings surprise. It would NOT have been on my screen ahead of the big announcement. But somebody on the Street was watching.

Points A & B show higher lows and higher highs. That is a classic indication of a change in trend. Note the long saucer base for the past six months – also a good sign. It might be just my eye, but I detect a cup around B.

Point C was a big clue that something was afoot. The jump that day was a decent percentage move into a new 52 week high. However, the big jump at Point D is what led the financial news pages of the day. At that point, the best way to play it is to go long and let the shorts’ pain provide the profit as they buy back into the market.

If you want hair on your chest, another way to invest intra-day is to use limit orders to buy when the stock again resumes moves into new high ground. Look for a jump into new high ground at Point E if AMZN finishes its recent consolidation.

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Written by heyercapital

May 15, 2007 at 9:04 am

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