Musk’s outsized influence on the entire S&P … a technical indicator to keep an eye on … gold continues tacking on gains
Even if you don’t own a single share of Tesla, its CEO, Elon Musk, can make you poorer.
Last weekend, Musk asked his followers on Twitter if he should sell 10% of his stake in Tesla.
This triggered a selloff in Tesla’s stock as Musk proceeded to liquidate roughly $5 billion of Tesla over the last few days.
As you can see, below, the stock began selling off hard on Monday, falling more than 17% from recent highs before finding support.
Clearly, this is bad news if you’re a Tesla investor. But if you’re not, why should you care?
Because there are echoes of the year 2000 here.
***Being aware of market history
The parallel to 2000, which we’ll detail in a moment, comes from our technical experts, John Jagerson and Wade Hansen.
In their service, Strategic Trader, John and Wade analyze a host of indicators, signals, charts, and historical market data to trade the markets, whether they’re up, down, or sideways.
And in Wednesday’s update, John and Wade looked at market history, pointing out why all investors should be wary of Musk’s antics.
From the update:
Setting aside the abdication of (Musk’s) fiduciary duties to his shareholders, that kind of behavior can impact non-TSLA investors as well.
At the time of his Twitter trolling, TSLA was about 2.5% of the S&P 500. That is roughly equal weighting as the entire utilities sector, energy sector, materials sector, or real estate sector.
Musk’s tweet was meant to make fun of tax policy, but it had ripple effects on TSLA and many other stocks.
TSLA sold off a bit on Monday and then dropped 12% on Tuesday. Tuesday’s decline was the worst dollar loss TSLA has ever experienced and the biggest percentage loss since September 8, 2020, which was before TSLA was added to the S&P 500 index.
***While this tale might seem to be a random market oddity, John and Wade point out a different angle – it’s evidence of increasing market fragility
The important parallel is that if we look back to the bull market that ended in 2000, we see some similarities.
Returning to their update:
Bull markets can continue to trend for a long time, but they also become increasingly fragile. Declines can be triggered by dips in stocks that make up a large percentage of major indexes, like TSLA.
Prior to the 2000 market crash, AOL and Yahoo had a combined weighting in the S&P 500 equal to TSLA’s, and the selling feedback loop for all stocks was kicked off by them and other highly valued tech companies that represented an overweight percentage of the major indexes.
Elon’s tweets are a bigger problem for the market than it seems on the surface.
To be clear, we don’t think this is going to cause a bear market, but the sooner TSLA’s shareholders stop selling, the easier it will be for the S&P 500 to continue rising.
As I write Friday mid-morning, the volatility remains. Tesla gapped lower, bounced, but is drifting south again.
***Meanwhile, there’s a bearish technical indicator that just triggered
After pointing out the market’s vulnerability to Musk, John and Wade highlight a technical indicator that triggered on Monday:
The other issue worth mentioning from earlier this week was a rare divergence between risk indicators like the CBOE’s market fear index (VIX) and the SKEW.
Both moved higher on Monday, despite the market also rising.
Although investors were pushing stock prices higher, they were aggressively hedging in the options market, which pushes the risk indicators higher.
A divergence between risk indicators and the stock indexes happens from time to time and it is frequently followed by a short decline like what we saw on Tuesday.
When these divergences start popping up regularly, that could signal a larger correction (-5 to -10%).
John and Wade tell us it’s too early to be worried about that type of drop right now, but it’s worth watching.
Here’s their bottom-line:
Overall, we don’t think the odds of a bear market have increased, but short-term volatility is likely to tick up a little. What we learned on Monday and Tuesday is that bulls are still in control, but they are a little jumpy.
This perspective mirrors that of Louis Navellier, which we highlighted yesterday – in short, expect near-term volatility, but look for the market to continue grinding higher as we close out the year.
Interestingly, if you’ll recall from yesterday’s Digest, Louis suggested we could see a correction come February. Keep an eye on John and Wade’s VIX/SKEW divergence over the next two months. If we begin seeing more of them, it could help signal the timing of Louis’ potential correction with greater accuracy.
***Meanwhile, don’t look now, but gold is…climbing?
Gold investors have had a tough go of it for almost a year and a half. The yellow metal’s price has been slumbering despite historic inflation numbers.
However, gold has been making a move recently, and this one might have legs.
We put this on your radar back in our October 13th Digest:
We’ve beaten up on the precious metal this week. But there’s one thing gold has going for it that might spur a rally. And we could be seeing the beginning of that rally today, as gold is up nearly 2%.
In short, the pessimism has reached an extreme – and by one indicator, it’s turning.
Below, we look at the Gold Miners Bullish Percent Index (BPGDM). This measures the extent to which gold miners (a proxy for gold) might be overbought or oversold, based on technical analysis.
As you can see below, it just bounced off the fourth-lowest reading in five years (far right side of the chart).
Source: StockCharts.comThe last three times BPGDM bounced from such deep, oversold levels, the price of gold ripped.
Below, we revisit the Gold Miners Bullish Percent Index.
It’s doubled since our October Digest.
As for the price of gold, it’s up more than 7% since late September.
And if we zero in on gold miners using “GDX,” which is the VanEck Vectors Gold Miners ETF, we see the trade is up 21%, tripling the S&P’s 7% gain over the same period.
One other bullish note…
Gold just exploded through its recent resistance around $1,835. You can see this below.
We won’t get ahead of ourselves and proclaim this to be the beginning of a massive golden bull, but it’s a great start – especially given how bleak things looked for gold back in September.
It reminds me of the words of our macro expert, Eric Fry. His quote below comes from September 19th, when it appeared gold was on the verge of falling through a key support level:
The yellow metal is barely registering a pulse at the moment. Most of the wax figures inside Madame Tussauds museum seem more vibrant and lifelike.
But that’s simply how gold behaves from time to time. It “does nothing” for such extended periods of time that investors begin to doubt it could fog a mirror.
Gradually, they turn their back on the comatose metal and leave it for dead. But that’s usually about the time it comes to life.
Eric has several gold plays in his Investment Report portfolio that are benefitting from the recent bullish price action. To learn more, click here.
We’ll keep you up to speed on how this plays out here in the Digest.
Have a good evening,
Jeff Remsburg
