I’m Stalking Amazon

The market is under pressure on Tuesday morning as interest rates continue to edge higher and semiconductors reverse sharply. The VanEck Semiconductor ETF (SMH) is down more than 4% but market breadth has improved to around 45%. There is some rotational action into pharmaceuticals and retail but pockets of momentum have dried up with around 30 names on the list of 10% movers.

I’ve been anticipating this seasonal slowdown for a while. It has been delayed but it looks to be gaining traction now. I believe it will lead to some good buying opportunities but patience will be needed.

I am looking at some of the Mag7 names for potential bottom fish plays. The Magnificent Seven ETF (MAGS) is down about 0.6% and approaching support at the 50-day moving average. The name I find most interesting is Amazon.com (AMZN).

Amazon hit an all-time high on Aug. 3 and has given back about 10% since. Nothing negative has happened at the company in that stretch. No warning, no guidance change, no bad news of any kind. What happened is that we moved into the weakest part of the calendar and the large technology names started getting sold together. That is the kind of weakness I watch carefully when I want to own a stock.

The Business Underneath

The big fundamental positive is that the cloud business is accelerating, which it is not supposed to be doing after the hypergrowth it has already had. Amazon Web Services grew almost 37% last quarter, the fifth quarter in a row the growth rate went up. Businesses this large are supposed to slow as the base gets bigger. This one keeps speeding up, and the margin expanded while it happened, which tells you the growth is not being bought with discounts.

Management says it still cannot build capacity fast enough to serve the demand it has, and that next year is largely spoken for.

There is also a piece of Amazon that does not get much attention. Advertising is approaching an $80 billion annual business growing better than 25%, sitting inside a company everyone thinks of as retail plus cloud.

Why It Is Being Sold?

The pressure on Amazon and the other big cloud companies is coming from chips. Memory in particular has gotten more expensive, which raises what all of them have to spend to build data centers, and Amazon took its spending plan up on the last call because of it.

You can watch the money move. It is coming out of the companies that have to buy this equipment and going into the companies that sell it, which is why the chip names have been strong on the same days the big platforms have been weak.

I am not dismissing the concern. Spending is climbing at a company whose cash flow is already stretched by how much it is building.

But chip pricing is about as cyclical as anything in this market. It runs hot, then it breaks, and it has done that reliably for decades. Some are saying it is different this time but the reality is that it is never different. The risk and the catalyst are the same thing here, and I like that dynamic.

Why This One and Not Alphabet

I could make a version of this argument for several of the big names, and Alphabet (GOOGL) is the obvious alternative. Its cloud business is growing more than twice as fast.

Two things keep me here anyway. Alphabet’s core is search, and there is an open question about whether artificial intelligence eventually eats it. That may take years to resolve and it may never bite, but it sits under the stock the whole time. Amazon has no equivalent looming over it. And Alphabet has already had this move. It sold off on its own spending news, ran hard off the low, then reversed sharply in early August. Amazon is earlier in the same process, which is where I would rather be shopping.

The business is not why I am buying. A good business is a good business at any price, which makes it an argument that can never be tested. What the numbers do is make it safe to be the buyer when this stock is falling and the chart looks broken. The weakness is the reason for buying. The health of the business is the permission.

How I Will Trade It

I am not going to buy a position in Amazon and sit there hoping I picked the low. I do not trade that way.

I buy in pieces and I sell in pieces, and I keep doing both the whole time I own the name. I take a small piece on a down day, small enough that if the stock drops another 5% I am pleased rather than annoyed. If it bounces a few percentage points over the next couple of sessions, I sell part of what I just bought. That is not a change of view. It is getting back to a place where I can buy the next drop.

In a stock this volatile I would expect to do that many times between now and the fall. The swings pay me while I wait, so I am not sitting on dead money hoping October shows up.

Selling into the bounces also keeps the position from getting too big too fast, which is the risk that blows up most traders who bottom fish. If I only ever add, a stock I like becomes an oversized holding one purchase at a time without my ever deciding to get that big. An oversized position sets a stop I never chose. It sits wherever my tolerance happens to run out, it has nothing to do with the business, and the market is good at finding it. That is how people end up selling the exact low they had circled as the place they wanted to buy.

The test is simple. If a decline would make me unhappy, I am too big and I have some selling to do. If a decline makes me want to buy more, I am sized right. Underneath all of that trading a core position builds slowly, and that is the piece I intend to still own in October.

What I Am Aiming At

The third-quarter report hits in late October and the calendar turns friendlier around the same time. Both arrive in the same few weeks, which is why that is the target rather than some price.

I expect to be selling into the anticipation ahead of that report rather than carrying a full position through it, since Amazon has already told us this quarter’s revenue may come in a little light. I would rather be paid for the run-up than gamble on the release.

I also want to be at my largest when the uncertainty clears rather than before it. Staying small right now is exactly what lets me buy the next leg down.

What would take me out is chip pricing that refuses to break. If these costs turn out to be permanent instead of cyclical, then the market is right to be marking these companies down and I am the one who is wrong. That is the question the next couple of months will answer, and it is what I am watching rather than the chart.

At the time of publication, DePorre was long AMZN.