Catching Fire

November 24, 2013

Weekly Market Outlook

By Keith Schneider


Catching FireSeveral weeks ago I highlighted in this column that Tesla's parabolic move to over $190 per share was overdone and even Elon Musk, founder and CEO of Tesla Motors, warned of irrational exuberance to shareholders. Since then, shares have dropped to just about $120. In a span of just six weeks, three Tesla's have caught on fire as a result of battery failure. Delving into this a bit further it seems that the company chose a more efficient battery technology both in cost, weight and its ability to get the best driving range, all critical factors in its recent success. However, the tradeoff was safety as the chemistry inside the battery is "highly charged" making it much more vulnerable to failures resulting in hard to extinguish fires. Considering the total amount of Tesla's now on the road one can apply the law of large numbers and it seems that where there is a spark, there is fire.

The real trading/investing lesson here is that the magnitude of parabolic moves is almost impossible to know beforehand and one needs to apply old fashioned tape reading to exploit such moves on the up and on the down. Also (note to self) it is fascinating to watch the "news" catch up with the tape. Back in 2006-7, for those that remember the financial meltdown (since the market is on new highs one tends to forget these things), housing stocks topped long before the market crash and long before earnings came crashing down. This is not to say fundamental valuation is not useful, but as former floor traders who participated in one of the greatest parabolic moves in history (silver and gold circa 1979), long term survival is based on one's ability to trade the tape and find out the reasons later.

Now, Getting back to Tesla, since the battery technology is the car's soul, Elon's number one job is restoring the trust and resolving technical issues. However, after the dust settles, my bet would be on Tesla.

There is lots of talk about a bubble forming in US Stocks and in this week's video we are going to address two key relationships that shed light on the matter.

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