Market Insider

Tesla's parabolic trading may be a warning about a broader stock market sell-off

Key Points
  • On its own, Tesla's wild ride higher last week to $968.99 and its subsequent more than 20% collapse looks like trouble for just one stock.
  • The stock was back up Monday morning, leaping as much as 9.7% on expectations its Shanghai factory will reopen.
  • But analysts say it shows a certain level of market euphoria that could be about to burst.
  • Other single stocks that have gone through the roof before riding the elevator straight down have foreshadowed sell-offs in the S&P 500.
Tesla shares pop in pre-market as Shanghai production is set to resume

While investors may look at Tesla's wild volatility as crazy trading in just one stock, some analysts say its bubbly behavior could be a warning for the broader market.

Doug Ramsey, CIO at Leuthold Group, says there are plenty of examples of overinflated assets or securities with volcanic price action that preceded bigger sell-offs in the stock market. Ramsey's list of "busted parabolics" includes marijuana stock Tilray, Beyond Meat, palladium and natural gas futures.

Tesla has a similar trajectory. It soared 132% from the beginning of the year to its peak of $968.99 per share Tuesday. In just two sessions, from the close on Friday Jan. 28, to Tuesday's high, it had soared 49%. Between then and Friday's close it lost 23% to $748.07 per share.

But Tesla spang higher Monday, as much as 9.7%, on reports its Shanghai factory could reopen as China deals with the coronavirus outbreak.

"I think this is a warning. I think it will trade lower from here," said Matt Maley, chief market strategist at Miller Tabak. "This stock may be going to be $2,000 in the next two or three years. That doesn't mean it can't go down significantly."

Maley said he expects the broader market to trade lower as well. "The problem is you never know when it's going to happen. Do we have to reach 30,000 on the Dow first? Does the Nasdaq have to get to 10,000? Maybe we have to. Those big round numbers tend to be magnets," Maley said. "It's going to come. It's going to come sometime this year. it's normal, and it's healthy."

Tilray's parabolic move was in September 2018, when the stock hit its peak, just two days before an important top was reached in the S&P 500, Ramsey noted.

Source: Leuthold Group

A few weeks later, another spike developed in the chart of natural gas futures, as the stock market rebounded in November 2018. Shortly after, it began a sharp year-end sell-off.

Source: Leuthold Group

Bitcoin broke down in late 2017, after quadrupling in less than two months. About a month later, the S&P 500 entered a two-week 10% decline, according to Ramsey.

Beyond Meat spiked after its initial public offering last year, an event that coincided with a short-term market top, according to Ramsey.

Ramsey said there's been a massive spike in palladium in the last two months. "It seems quite likely there will be some variety of a speculative stock market 'echo' in the months ahead," Ramsey noted.

Ramsey and Maley said investors are trying to make comparisons between Tesla and the 1999 tech bubble. In some cases, they see no parallel because they argue it's a tale of just one stock and determine there's no danger.

"The problem, in my opinion, is we're never going to see euphoria like that again in our lifetime," Maley said of the bubble that spread across many tech names. "You don't need to see that kind of euphoria." Maley said some other stocks are showing signs of euphoria, but not the same hyper-parabolic moves of Tesla.

"We're seeing in some other stocks, like Apple," he said, adding that Microsoft also keeps going higher.

"At 30 times earnings, that's getting expensive. It's nowhere near 1999. Microsoft is a great company. It has seen a very strong move," Maley said.

Maley said one risk is that the market has moved higher on the strength of a few names. "These are great companies but to think they can't go down significantly is kind of crazy. This reminds me of 2017. In 2018, we had two corrections," he said.

Not all traders agree that Tesla's wild trading is sending a message. "There's always hyper-focused special situations in the market that show excess risk, but it does not always signify overall euphoria in the market," said Scott Redler, partner with Redler said he had been long Tesla from when it was $340 earlier in the year, until last Monday, as it hit the $700s and before wild ride to the $960s.

"The fever definitely broke on it," Redler said.

Maley said Tesla has "washed out" to the upside. "Because it was forced buying, all of the short covering and the algo driven forced buying, that's the exact opposite of when you see a stock washed out to the downside ... when it ends, there are no sellers left and it bounces strongly for more than just a few days." In Tesla's case, it is signaling more downside, he said.