Updated 21-Jan-99
The Internet Elite Decline
Amazon.com (AMZN), Yahoo (YHOO), and EBay (EBAY), the heavy hitters of the great stock
market of 1998, have all taken a beating in January 1999.
Here is a table of each stock's recent declines, all of which happened in less than two weeks.
Declines From Tops
Company
Stock
Date High
High
1-20-98
Percent
Amazon.com
AMZN
1-08-99
199 1/4
113
-43.3%
EBay
EBAY
1-08-99
321
213 3/4
-33.4%
Yahoo
YHOO
1-11-99
445
287 3/16
-35.5%
Charts
Here are charts of the three stocks. Click on any chart to see it in full size.
Note that on all three charts, from the high point, daily volume declines as the price falls. In
addition, from the high point, the intraday range narrows on each day. Yahoo shows the least
volume erosion, but it's there nonetheless.
Technical Analysis
All three of these stocks are pretty close to fitting the classic definition of a pennant formation. In a
pennant formation, the lines outlining the top of recent declines, and the lines outlining the bottom
of recent declines form a "pennant" which points downward. Amazon.com and Yahoo are forming
their first pennant. EBay formed its first starting in the middle of December, although this one
does not fit the formation as well as the other two stocks. EBay appears to be forming a second
pennant formation starting from its all time high.
The pennant formation is a positive indicator, according to technical analysis theory, if the
following three items also occur:
The pennant forms after a sharp run-up (true for all three)
Volume declines as the pennant pattern continues (true so far for all three)
A sharp upswing occurs within two weeks of the top, on much heavier volume than during
the pennant formation
EBay's first formation does not exactly fit the declining volume criteria, but it is close. However,
the sharp upswing in EBay, from around 240 on January 4 to 320 three days later, was on much
lower volume than earlier runups. And the price has failed to hold.
Technical analysis investors look for pennants and pay particular attention to the volume. If the
pattern breaks upward on higher volume, they jump in, with a target of the previous high. It is a
fairly common technical indicator.
However, pennants are best played from the sidelines, because if the formation does not break on
higher volume, it is considered a strong negative signal.
EBay, illustrates how this is played. The first pennant formation, although not a classic pennant due
to the level volume through most of the end of December, broke with higher volume right at the
beginning of the year. When the stock went higher than the old pennant top, they sold.
From a technical analysis, Amazon.com and Yahoo are now at critical points. Volume will be the
key factor to watch for both of these. Will the technical players come back if volume shots upward
with an upward price break? Continually declining volume, even if the price holds, should be
viewed as particularly negative.
What declining volume indicates is a lack of demand. If many people wanted a stock at 100 just
weeks ago, but don't want it today at 70, what does that tell you about persistent long term demand?
Unfortunately, all three of these stocks are currently showing a clear downward trend in volume,
accompanied by price decline. If they don't show higher volume within the next week or so, with at
least a modest upward price movement, the technical players will pass them by. A pennant must be
played within the two to three week period.
Technical analysis, however, is a very imprecise science and works best in the absence of all other
factors. In today's market, there are other factors to consider.
Other Explanations
Part of Amazon.com's decline yesterday was due to comments coming out of Oppenheimer on
Wednesday, indicating caution on Amazon.com. The recent moves by ONSALE to sell items at cost
plus a small fixed fee will pressure Amazon even further, Oppenheimer argues and we agree.
In addition, @Home's (ATHM) announced merger with Excite (XCIT) leaves investors wondering
what Yahoo's plans are. The lack of any major deal announcement or takeover rumors is raising
doubts about Yahoo's ability to stand alone. While everyone else seems to be finding dance
partners, investors begin to wonder if Yahoo needs to find someone as well.
The problem with explanations like this, however, is that most of these stocks left the realm of
being connected to underlying business trends long ago. EBay, for example, has been trading on
purely emotional issues for months.
Nevertheless, business developments do have an impact when they begin to raise doubts about a
company's eventual, and inevitable supremacy. Such doubts are now being raised about all three of
these companies.
Briefing.com's Conclusion
What happens if the Internet Elite collapse?
No matter what you think about any of the Internet stock valuation issues, if these three Internet
stocks collapse, it can only be bad news, not just for all other internet stocks, but possibly for the
broader market as well. If Yahoo can't go up, why should second-tier internet stocks go up? If
internet stocks can't go up, what happens to the investors who want to play for doubles in a week?
Will they want to buy Dow stocks? Or will they just take a rest for a while?
At this point, we aren't predicting a total collapse of the Internet Elite stocks.
But it is time to start watching for indications.
All three of these key Internet leaders should be on everyone's watch list. Particularly of interest
should be the volume. Continued declining volume for the stocks will be a bad sign, even if the
price stabilizes. Declining volume with declining prices is much worse. These are stocks that have
been leading the overall interest in the markets. If they don't become more attractive at lower
prices, indicated by a rise in volume, what will make them attractive? Even lower prices? How
low?
On the other hand, if volume in each stock begins to pick up over the next week or so, it would be
a positive sign, at least for the short term. So, either way, watch the volume in Amazon.com, EBay,
and Yahoo. You won't be the only ones watching. |
