TWTR – Twitter Might be the Canary in the Coal Mine

by John Jagerson and Wade Hansen | January 9, 2014 2:00 pm

We, as humans, are always on the lookout for signs of danger. It’s part of who we are, and for good reason. Those who are good at spotting signs of danger survive. Those who are not, don’t.

Coal miners had to be especially vigilant in their surveillance because many of the dangers that awaited them — like methane and carbon monoxide buildups — were imperceptible to human senses. To combat this problem, coal miners would bring canaries with them into the coal mines. Canaries are much more sensitive to these elements and would change their behavior depending on the concentration of gas in the mines. If gas levels were safe, the canaries would continue to sing. If gas levels started to rise, the canaries would stop singing. If gas levels reached critical levels, the canaries would die. Coal miners knew that if they paid attention to the canaries, they would increase their chances of survival.

If you’re looking for a “canary in the coal mine” on Wall Street to give you an early warning sign of when the bullish run in the stock market might be over, Twitter (TWTR[1]) — with its little bird for a logo — might just be it.

Watching Twitter

TWTR is a compelling canary for a few reasons.

First, it is the new shiny object on Wall Street. With an initial public offering (IPO) on Nov. 7, 2013, it has only been available for two months. It’s still in its honeymoon period.

Second, just as they have with many other momentum (“momo”) stocks — like Tesla (TSLA[2]), Netflix (NFLX[3]) and Amazon (AMZN[4]) — investors have bought into the idea TWTR has the potential to dramatically increase its revenues and earnings in the future.

Third, Wall Street has been quite generous in giving stocks with any type of social media affiliation — like Facebook (FB[5]), Groupon (GRPN[6]) or LinkedIn (LNKD[7]) — the benefit of the doubt when it comes to actually showing the much anticipated revenue and earnings growth.

Despite all of this, TWTR has been the target of a parade of analyst downgrades during the past few weeks.

So how do you think TWTR is doing after all of those downgrades? Take a look.

Daily Chart of Twitter (TWTR)

TWTR is down from its high of $74.73, but it is still up more than 100% from its IPO price of $26 per share. In other words, this canary is still singing. It may not be singing quite as loud as it was in late December, but it is still singing.

You’ll know that TWTR has stopped singing if it drops below near-term support around $55. It won’t be dead yet, but it will have stopped singing, and that will be a great indication that the bullish momentum on Wall Street that has pushed these “momo” stocks higher is finally starting to subside.

  1. TWTR:
  2. TSLA:
  3. NFLX:
  4. AMZN:
  5. FB:
  6. GRPN:
  7. LNKD:

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