Things that go bump in the night: Boeing and Tesla

Back on September 23^rd, Tesla’s stock price was still in the process of shooting to the moon.  The stock had risen fivefold from a price of about $35 on March 18^th to $181.  There were few signs of people jumping off the bandwagon.  Was the stock price being propelled by fundamentals or macro indicators, or were other factors driving the stock higher?

For those of you who are new to our weekly post, EidoSearch uses cutting edge pattern recognition software to quantify the way investors are likely to respond today by studying their behavior during similar market and trading environments in the past.  On September 23^rd, EidoSearch was projecting a drop of -9.19% in Tesla’s stock price for the next one month period.  Well, we were pretty close…..it was actually down -9.17% in the next month! (see charts below).

As is always the case, there were multiple factors involved.  In this case the battery fire reported around October 2nd was certainly a big driver of the pull back, and since then disappointing earnings and questionable handling of PR have helped the stock slide even further to the tune of a 37% drop from its high of $193.  That being said, this wild swing over 8 months from $35 all the way up to $193, and then back down to $120 isn’t explained by fundamentals and news alone.  Investor behavior, both euphoria and fear, was a key factor.

The point of this isn’t to pat ourselves on the back regarding the above call, although we’re happy to take some credit, but rather to highlight the importance of having a statistically driven input for investor behavior as part of the investment mosaic.  We also wanted to put this example of a recent parabolic stock run-up to good use.  That is, we decided to take this pattern when Tesla was still on the rise at $181 and apply it to all CURRENT U.S. stock price patterns to identify the companies trading most similarly right now.  What stocks might be exhibiting the same “flashing hazard lights” that Tesla was before its decent?

One in particular, Boeing, stood out.  Boeing is up 76% since March 1^st, and coincidentally they’ve also had their own issues with battery fires.

As usual, the patterns speak for themselves….let’s go to the mattresses.

Tesla’s price chart from its IPO on June 29, 2010 to September 23, 2013.

On September 23^rd, we identified the 56 most highly correlated historical instances of Tesla’s price pattern

over this period of time (3¼ years) and looked at how investors traded in these stocks over the next one

month.  The result was an average drop of -9.19%.

We then searched across all US stocks to see which ones were exhibiting the most highly correlated

price patterns today.  Boeing was one of the closest matches, exhibited below in orange vs. Tesla’s stock

price (as of September 23^rd before it dropped off) in blue.

Boeing’s price chart by itself with dates, starting with its high on April 19, 2010 through Friday’s close

We took the above price pattern for Boeing and narrowed the search by looking at when we’ve seen this

pattern historically in all US Industrials stocks.  30 out of 45 of the stocks were down in the next one month

period, with an average drop of -4.65%.

And finally, to appeal to the fractal nature of patterns, we narrowed this down to the last one year pattern

in Boeing.  However, instead of looking at the most similar historical instances across Industrials, we just

looked at when Boeing itself traded like this over any one year period in history, and to see how the stock

traded 1 month forward.

Although the projections are not quite as dramatic as Tesla’s, watch out for the downside risk in Boeing through year-end.

Learn more at www.eidosearch.com or email us at info@eidosearch.com.