Below is a monthly chart showing the price of Amazon (AMZN) shares since inception.
Crazy? Maybe. But I'm not going to focus on the parabolic move in price today. Instead, I want to focus on the declining grey bars at the bottom of the chart. The grey bars represent trading volume.
Surprisingly, the volume has been steadily declining since Amazon began the parabolic rise in 2009. It is completely different now than in 1999. It's not new money and volume coming in to take out incremental sellers in a hot stock like in the dot.com bubble, but instead something else.
And what might that 'something else' be? Amazon now possess the 16th largest market cap in the World and is in just about every single benchmark index. If you buy indexes, you buy Amazon. Every time you buy SPY, QQQs or 'Growth Funds' an Amazon allocation is made creating a steady stream of buyers - effectively 'at any cost.'
To top it off, active fund managers think: "Why go underweight Amazon versus my benchmark and have to explain my under performance if it goes up? I'll just buy it and put it in my book. If it blows up I can't lose because everyone else has it in their benchmark too. I can't be fired for losing just as much money as everyone else."
Nobody sells and the market buys every time someone clicks the 'Growth Fund' box on their 401k. The result is a rapid rise on declining volume - the Institutional buy and hold crowd is holding positions while the incremental demand from the indexed bid is pushing the stock higher. Not a bad scenario if you are long, but it is the declining volume that has me worried.
Why? The reason volume is so important here is because of something no one discusses (except me) -- liquidity risk. Many hedge funds will cap position sizes based on ADV -- Average Daily Volume. Why? If you want to get out of something, you need to know you can get out without crushing the market. The declining volume and increasing Institutional positions sizes are indicating increasing liquidity risk. It's actually quite scary. With ADV at around 2.5 million shares, I need to page through 20 or 30 holders before I find one who has a position size less than ADV.
There are really no true buyers at these levels, just large Institutional funds holding on to paper gains while their liquidity risk increases and the indexed bid props it up. And there are not even any shorts to cover and stem the decline when it breaks. Below is the AMZN short interest over time. Everybody was short at $50, nobody is short at $401.
This is a recipe for disaster. Complacent Institutions hold on to paper gains as the market pushes Amazon up under them, while volumes and short interest decline and liquidity risk increases. Now that being said, it can continue for some time. For now, the path of least resistance for a fund manager is to own it.
"It's in my benchmark" is the kind of complacent thought process that will keep the bubble going. And it can continue for some time. But when it breaks, it is going to be very, very ugly. Low volume and low short interest means Amazon is effectively a crowded theatre with a small exit door. If you are long, you better hope no one ever yells 'fire.'
Additional disclosure: I am long puts in AMZN. I have partially hedged them with calls. (I am basically long a straddle)