How to Avoid the ‘Amazon Bear Trap’

Editor’s note: The markets and our Chaikin Analytics offices will be closed Monday, January 17, to commemorate Martin Luther King Jr. Day. Because of that, we won’t publish the Chaikin PowerFeed e-letter. Look for your next issue on Tuesday, January 18.

We’re all human… We all make mistakes.

But that doesn’t mean we should accept them. We should do our best to avoid preventable mistakes… That’s one of the keys to becoming a successful investor.

Yesterday, I shared the sad story of “Larry Smith”… That’s the made-up name of one of my old online adversaries. Our biggest battles related to online retailer Amazon (AMZN)…

About a decade ago, Larry urged users of a financial website on which we both wrote to bet against Amazon. And then, its price almost doubled from December 2011 to October 2013.

As we discovered, Larry’s preventable mistake was his extreme overconfidence… He believed that he understood Amazon better than anyone else in the world – but he didn’t.

Today, we’ll learn what you can do to avoid falling into the “Amazon bear trap” like Larry…

It all starts with my colleague and Chaikin Analytics founder Marc Chaikin. As a 50-year-plus Wall Street veteran, he understands that the markets have evolved over time…

Dismissing what the market is telling you might’ve worked many decades ago. Back then, it was hard – and expensive – to get basic information. So it was much easier to gain an “edge” on other investors.

But we’ve come a long way from those bygone days… Thanks to the Internet and other technological advancements over the years, it’s naïve to think that way nowadays.

That’s part of the reason why Marc has worked so hard to help folks become better investors… He wants to make sure folks can avoid falling into traps like Larry Smith did.

One of Marc’s most popular creations is a technical-analysis indicator called the “Chaikin Money Flow”… In short, it measures the buying and selling pressures in the market. And it appears on every Bloomberg terminal in the world.

In the early 2010s, Marc expanded and refined his work… He developed the “Power Gauge” system. This quantitative tool analyzes 20 different factors for every stock in its universe. In the end, it comes up with a simple rating – from “very bearish” to “very bullish.”

It’s a powerful tool that can find companies primed to outperform in the months ahead.

On the surface, the Power Gauge resembles the “growth at a reasonable price” (“GARP”) strategy. This approach recognizes that a stock’s proper valuation can rise or fall based on growth.

But the Power Gauge separates itself from traditional GARP in one critical way… In short, it uses other clues to shed light on the unseen future.

I refer to these clues as “growth proxies.” These factors within the Power Gauge relate to sentiment (expert opinions) and technical analysis… They reflect existing expectations and changes in Wall Street’s perception of future growth prospects.

Since the Power Gauge addresses growth in a smarter way, I refer to it as “SmartGARP.”

Back in December 2011, when Larry Smith started short-selling Amazon, the stock’s Power Gauge rating was “neutral+”…

In other words, folks who were willing to look beyond some short-term market skittishness could consider buying shares. Most important, the Power Gauge made it clear that investors should not sell short Amazon at the time.

The Power Gauge rated Amazon as “neutral” or better 95% of the time as it almost doubled through October 2013. In other words, it didn’t recommend betting against it like Larry did.

Larry might’ve fared a lot better if he had the Power Gauge at his side. Fortunately, this tool can help investors like you avoid the “Amazon bear trap” with only a few clicks today.

Good investing,

Marc Gerstein

Editor’s note: Right now, you can get a full walkthrough of the Power Gauge directly from Marc Chaikin… He recently put together a special presentation to explain how everything works. And just for tuning in, you’ll receive a free recommendation. Get started right here.

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