I’ve spent the past couple of weeks pouring over charts… easily several hundred of them.
You see, our Dent Research Irrational Economic Summit is less than a week away and I have a big task at hand. That is I must convince attendees that irrational markets are actually golden opportunities for profit… not a frustrating conundrum.
I firmly believe that consistently irrational behavior, across the entire spectrum of investors and traders, is the root cause of price trends and speculative bubbles.
And while it’s easy to find plenty of people who would agree with that hypothesis, most remain befuddled as to how an investor can consistently profit from irrational market moves.
Call it a bubble… call it a cult momentum stock… either way, Tesla Motors Inc. (NASD: TSLA) has made for one heck of a ride this year!
As a hat tip to Rodney’s Edsel reference, this classic was a car like never before.
Tesla too could easily carry that title.
The company’s truly unique product, and business model, has spurred a swelling of interest and demand for its cars and its stock.
Shares of Tesla were trading around $35 just eight months ago. Today, they’re going for $160, after hitting an all-time high of $194.50 in September.
455% in six months is insane! We might even be tempted to call it, yes, irrational!
Whatever the label, Tesla’s epic rise was quite the payday for trend-followers who got in early.
Here’s a chart of Tesla’s stock, showing one systematic trend-following model that I follow. The blue lines indicate trades that generated a profit, while the red lines show trades that suffered a loss. Take a look…
As you can see, this model produced a mix of winning and losing trades, like all investment programs. The trick, of course, is to keep the losses short and small, while letting the winner’s run. As Tesla has proven, the run can be longer and further than you’d ever expect… from rational markets, at least.
Buying 100 shares of Tesla on March 19 (circled in blue) and selling on July 29 (circled in red) generated a gain of $9,407. On the initial investment of $3,525, that’s a 167% return!
You’ll see the investment model went on to generate more trades – a couple of small losses and a couple more gains – as it systematically chose long and short positions in anticipation of the next developing trend.
So, can we expect an epic fall to follow Tesla’s epic rise?
From a market-demand perspective, Tesla won’t have trouble selling its cars anytime soon. That trend is far from over. It’s just getting started, actually.
But Tesla’s share price is obviously stretched to the upside, so don’t be surprised to see a significant correction unfold the next time the market turns soft.
The investment model shown above has taken a bearish position since October 28 so buyers beware!