Have the wheels fallen off Tesla?

This high-profile maker of electric vehicles divides investor opinion like no other.  Its founder and boss, Elon Musk, is a self-publicist non pareil (matched only perhaps by that other self-promotion genius Richard Branson).  Despite there being scores of rival electric cars either in production or about to be, it is the  glamour surrounding the Tesla story that grabs most of the headlines.

The bears point to the little matter of no earnings since launch – the losses have been huge.  Back in the anti-diluvian Tech Boom of the 1990s, lack of earnings was no impediment to a booming stock price.  Back then, all that mattered was the ‘burn rate’ and eyeballs on the website.

But how different today – investors burned by that experience want real profits measured in greenbacks, not eyeballs.  And the tech giants of Apple, Alphabet, Amazon etc are supplying them in shedloads.  The FAANGS can certainly justify a decent valuation based on their earnings. But not Tesla.

Of course, the bulls believe it will be in massive profit once everything falls into place.  This is what I call The Crossed Fingers investment system.

Here is a good review of the difficulties Tesla is facing on Bloomberg.

As it climbed into the stratosphere, I was not willing to join the bulls because when the mood music changes, something would put a spanner in the works.  I thought the current massive state subsidy for a car buyer would be reduced or even withdrawn.  But little did I know that this is being seriously proposed so soon.

In fact, I have been waiting for a suitable opportunity to short the shares – and that was presented to me on 25 October, just a week ago.

This is a shot of the Trade Alert I sent to VIP Pro Shares subscribers then:

I noted the lovely five up with wave 5 on a momentum divergence and the blue trendline joining the lows of waves 2 and 4.  And on that day, the shares were breaking down below that support.

As noted, my first target was the wave 4 low at around the $300 level.  And yesterday, that target was hit with some overshoot.

Now, we could be in a third wave down with the sharp decline last week giving us a clue that indeed may be the case.

So will Tesla follow most of the canal and railway companies in the 17th, 18th and 18th centuries into bankruptcy and oblivion?  Those technologies were revolutionary at their times.  Heavy goods could be shipped by canal barge far cheaper and faster than over the pock-marked rutted roads by horsepower.  And railways could do the same and disrupt the canal industry.  Canal shares were decimated.

We are living in an era of very rapid technological change and I find it laughable that people are making serious projections decades into the future.  Of course, there will be a few winners, but many, many losers.  Only a few years ago, Nokia was king of the mobile phones – now look at it, struggling to re-invent itself.  A few years before that, IBM was a pioneer in tech and top of the computer hardware heap.  Now, it is a shadow of its former self (although we are long!).

I have found over the years that the company stories with the greatest hype rarely stay king of the hill for long.

Is FTSE near a major top?

US stocks indexes keep making new highs almost on a daily basis and remarkably is drawing little attention in the MSM.  It’s as if everyone takes new highs for granted and considers this current roaring bull run perfectly normal.  If they do, they have short memories.  But this aligns with the extreme complacency in the market that is revealed in many other indicators.  Sadly, the UK market is bereft of the same kind of indicators that are readily available in the US, so I shall refer to these.

Here is just a sample of the multiple indicators that show we are in historically high ground not just for stock indexes, but for sheer certitude that nothing bad will happen to shares (the five charts below courtesy elliottwave.com)

Investors Intelligence has been going since 1963 and conducts a highly respected weekly survey of market newsletters to determine the proportion that are bullish or bearish stocks.  The above chart shows the ratio of bulls to bears and in recent weeks, has jumped up to 4.4-to-1 which is the highest since just before Black Monday 1987.

On the left is the percentage of assets that US pension funds have allocated to cash.  From the 1970s high at 17%, it has fallen in five clear waves (with a very long and strong third wave!) to the recent record low of 2.5%.  When an entire financial industry shuns cash to this extent, they are maximum bullish on assets.  And why not?  Shares, vintage cars, art, mansions and even bonds have been in massive bull markets.

Not only have the pros have fallen madly in love with assets and shunned cash, the other chart shows the American Association of Individual Investors survey of retail mom and pop investors.  It highlights the depressing universal principle that all investors buy high and sell low.  Here, the ratio of cash/assets has dropped to a 17-year  record low of 14.5%. But back in 2009, shares had sunk and investors had sold into the decline to raise 44.5% cash at the March 2009 low.  But that was the very time to buy shares!

The last time cash holdings were this low, shares were on the brink of the Bust phase of the Dotcom Boom of the 1990s.  But now, investors have piled into shares in a big way.

Above is the left is the Investors Intelligence survey of bears/bulls and shows the 200-week ratio that shows the most extreme reading in over 50 years.  When a reliable measure of sentiment as extreme as this appears, we should take note.

The other chart is the University of Michigan consumer survey that polls on the expectation for share prices over the next year.  Again, it backs up all the other indicators by reaching a record high bullishness.  Over 65% of respondents are bullish over the next year.

When a wide variety of sentiment measures are totally aligned mostly in record extremes, even a small ‘unexpected’ shock could bring the house of cards tumbling down.  Many use the ‘money waiting for dips in the wings’ theory to justify their confidence.  But cash holdings are low – everyone is fully invested. Most of the QE funds have gone into assets and I do not believe the Fed would ever reinstate it (unless and until the stock market is many tens of percent down in a selling panic).

So all of the conditions are perfectly set up for a Big Top that will herald a major correction of at least 50% in the Dow/S&P/Nasdaq.

But sentiment indicators, although at extreme levels, are poor timing inputs.  For that, we must use other methods, such as my Tramline method.

OK, now we  know that bullish sentiment on both sides of the pond is extreme, how will the FTSE play out?

Here is the weekly since 2015

From the Feb 2016 low, the market has climbed in five waves with waves 2 and 4 in textbook threes.  Now we are in the final wave 5 and should now be looking for an end and a reversal.  Here is the 4-hr

With last week’s push to an all-time high at 7580 in a long and strong third wave, my best guess is that we shall have a small dip in wave 4 and then a push to a new high in wave 5 of 5 to at least the 7600 level.  If it attains that, I shall be looking for an exit for my longs and reverse to short.

Looking at the big picture, because the FTSE is dominated by the big oil majors and metal miners, the fact that only now after ten years of ’emergency’ QE and ZIRP, stocks have only just crept into new high ground.  That is pretty poor, compared with the US indexes that have grown by many times.

I had penciled in a stock market top for early November so if this  comes to pass, the turn should appear pretty soon.

Incidentally, the current sex scandals in the US and in the UK Parliament appear to be signaling the end game for the very permissive societies that have developed in both nations in recent decades.

The backlash appears to be harsh.  In a recent post, I alluded to the valuable lessons from ancient Greek and Roman history. The whole scenario of today’s Establishment losing power must be a carbon copy of the Decline and Fall of the Roman Empire.