Over the past few months, I’ve detailed the intriguing mathematical relationship between hydrogen fuel-cell specialist Plug Power (NASDAQ:PLUG) and electric vehicle manufacturer Tesla (NASDAQ:TSLA). Essentially, their respective technical trends share a remarkably strong direct correlation: as one goes up, so does the other. That’s why in September, I posited that PLUG stock is akin to buying Tesla at $13.
A month later, I noted that PLUG-TSLA relationship was still on. Indeed, my belief was that both securities were forming bullish technical patterns. So, as long as Tesla was still courting strong demand, the implication was that Plug Power stock would go along for the ride. But could the good times keep rolling?
In that October article, I warned that longer term, it was possible that the correlation could break off. And that’s exactly what I observed — or at least the potential beginning stages of a fracture — in early November. Suddenly, the correlation coefficient dropped from the 90s to the high 50s. Soon after publication, my InvestorPlace colleague Lou Carlozo offered his take on my observations:
As a best-case correlation scenario, PLUG stock is enjoying a rocket ride as the EV sector spreads its wings and, in theory, will demand bleeding-edge power technologies … But at worst, the PLUG stock-Tesla linkage represents an absolutely spurious correlation. Like? Per capita cheese consumption versus number of people who died by getting tangled in their bedsheets. Someone actually researched this and it’s 94.7% over nine years.
I couldn’t have said it any better. Carlozo is one of the smartest people in the investment analysis world and I appreciate his insights. Plus, he’s right. This is a correlation that’s significant for Plug Power stock — and profitable — until it ceases to be so.
At this point, the real money is to figure out when investors might want to secure some profits. That’s where I’ll be focusing the discussion below.
Will the 2020s Roar or Ratiocinate for PLUG Stock?
As Matt McCall has consistently laid out over the years, we could be on the cusp of a massive technological convergence, where innovations across multiple industries organically link together to spark the next-generation economy. He calls it the Roaring 2020s, which is a catchy name. If McCall is proven correct, you’d figure this should bode well for Plug Power stock.
But I’ll tell you what’s not so sexy: the Ratiocinative 2020s. This is a possible situation where people take note of the extreme dichotomy in the present situation — where equity indexes breach all-time highs while desperation and suicidal ideations are also “in demand” — and adopt sensible, rational strategies moving forward.
Let me take my analyst hat off for a second and speak to you in real terms. I believe there’s something desperately wrong when dumb privileged white girls can make millions of dollars dancing on TikTok — typically to Black-produced music — while everyday Black workers themselves suffer disproportionately to other demographics during this novel coronavirus catastrophe.
To paraphrase comedian Louis C.K. — who apologized for vile behavior — you know this situation can’t last forever. And that could pose problems for Plug Power stock.
Here’s something that doesn’t get discussed that much but it should: the stock market tends to be cyclical. But more critically, we may be facing the wrong end of the market’s undulations.
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Take for instance the average returns by decade of the Dow Jones Industrial Average since 1900. You’ll notice that between the 1920s through the 1970s, a pattern emerges: after a decade of double-digit returns, the market incurs two decades of low single-digit returns to correct the enthusiasm.
But something changed in the 1980s, which is the era of Reaganomics. Rather than “up one, down two,” the Dow produced two consecutive decades of double-digit returns. Then, in the 2000s decade, we saw an average gain of 0.1%, followed next by the last decade, which again averaged in the double digits.
If we assume that this decade will roar, that means we would again have two consecutive decades of double-digit returns without adequate correction. Put another way, it seems we’re cheating equilibrium.
Time for Some Caution
For investors who are truly bullish on PLUG stock, you should know that some analysts believe that, based on Kondratieff Wave theory, we’re on the cusp of an incredible period of prosperity. That thinking/evidence aligns very well with Matt McCall’s thesis.
But from my perspective, I don’t think there’s anything wrong with being cautious. Recently, I have become increasingly uneasy about over-exuberance toward equities. Yes, the idea of the extension of the bull market makes sense due to ramped-up technologies. However, people don’t usually kill themselves when the economy is booming or when they have something to look forward to.
If you have a sizable position in Plug Power stock, now might be a good time to take some profits off the table. At some point, every relationship and every story will close a chapter.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
