The Start of the Collapse for “Internet Darling” Stocks?

Amazon Stock The Fall from Grace StartsIf you want to see what happens when irrationality over a stock comes to an end, check out this chart of Amazon.com, Inc. (NASDAQ/AMZN).

In 2013, Amazon.com stock went up 63%. So far this year, the stock has collapsed 25% as investors realize converting growing revenues into corporate earnings for Internet-based stocks on key stock indices is not an easy task.

Mind you, Amazon.com isn’t the only tech stock on the key stock indices that is getting hit. Other tech stocks are under pressure, too, as evidenced by the NASDAQ being down for the year.

But despite stocks being overvalued—and some very big-name Internet stocks on the key stock indices coming down in price—investors continue to buy.

Amazon.com Chart Chart courtesy of www.StockCharts.com

In the first three months of this year, the long-term stock mutual funds saw inflows of $54.13 billion. (Source: “Historical Flow Data,” Investment Company Institute web site, last accessed May 12, 2014.) April’s monthly figures aren’t available just yet, but from weekly data, we estimate another $10.0 billion worth of long-term stock mutual funds were bought in April.

And they are buying stocks with borrowed money. As of March, margin debt on the New York Stock Exchange (NYSE) stood at a record $450.2 billion, up 19% from March of 2013. (Source: New York Stock Exchange web site, last accessed May 12, 2014.)

But this is what I find most interesting…

Even though investors have borrowed more money than any other time in history to buy stocks, most key stock indices are flat for the year. Among the key stock indices, the Dow Jones Industrial Average is up marginally, while both the NASDAQ and Russell 2000 are down.

Earlier this week, I wrote about how I felt investors were getting ready to lose their money on stocks again. (See “When the Cows Go Out for Slaughter a Second Time.”) While I can’t predict the exact turning point of the key stock indices and when they will start to head southward, I can tell we are getting closer to a massive sell-off each passing day. Amazon.com’s fall from grace is just the beginning.