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You're Nuts If You See Amazon's P/E as a Buy Signal

Stocks in this article: AMZN FB YHOO AAPL EBAY NFLX GOOG

We are going to party like it's 1999! I feel like I am back in the 90s after reading my good friend Rocco Pendola's article Amazon's P/E of 3,000: The Ultimate Buy Signal .

Pendola writes that very few people actually short Amazon and he's correct. The short interest is relatively small, however, based on the trading volume, the number of days to cover for shorts is trending higher. Also, short sellers are the smart money, they know that inflated valuations can last well beyond their ability to carry the position.

Whitney Tilson and T2Partners come to mind with his Netflix (NFLX) short position. After placing a sizable short position and writing about it at the end of 2010, he followed up in February 2011 with another article why he covered his short position. On Feb. 11, 2011, Netflix closed at $231 a share. Eight months later Netflix traded for less than $75 a share.

Being right isn't good enough, you also have to time your entries and exits or you still lose. This law of investing must be obeyed by both longs and shorts or they will face the judgment of the marketplace. Undoubtedly, there is a lot of money sitting on the sidelines to short Amazon, but fund managers want to see a showing that the unbridled enthusiasm is waning.

If you're hell-bent on making rookie investor mistakes while flashing warning signs surround you, you might as well play Prince on your MP3 player and relive the day trader go-go days as realistically as you can.

Pendola is right about not digging your heels in and ignoring the reality of the ultimate valuation judge, the market. As long as the market declares Amazon isn't required to provide a return on investment, the stock will remain at "mind numbing" levels.

Pendola makes a valid point in respect to Cramer not using Amazon's price-to-earnings ratio when assessing the company's financials. That's all fine and dandy for Cramer, but you're not likely at the investing caliber of Cramer, so just maybe want to use every possible metric you can. The choice is yours, but dismissing every possible piece of information is at your own peril.

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