“Betting On A Dream”: Could Tesla Be The Canary In The ETF Liquidity Coal Mine?

All eyes are going to be on Tesla this year. 

The stock has been smashed over the last few weeks amidst a broader sentiment heat-check for NASDAQ names, high flying technology stocks and, well, just other speculative garbage. 

Over the last month, Tesla has fallen from about $868 to $598, a plunge of about 31%. But it isn’t just Tesla investors that are feeling the pain: with the stock having risen in popularity over the last 18 months, Tesla is now tied to numerous ETFs that it winds up pulling lower when it underperforms. In fact, Bloomberg notes that “at one point on Friday, every one of the 54 U.S.-based ETFs that have assets under management exceeding $1 billion and more than 1% invested in Tesla had fallen.”

The most notable ETF is ARKK, which we have profiled at length, and exhaustively. Manager Cathie Wood had been buying shares of Tesla for the ETF as it plunged over the last couple weeks. 

Analysts are warning that one stock having as much of an impact as Tesla does could very quickly lead to things “going haywire”, should it plunge further.

Mohit Bajaj, director of ETFs for WallachBeth Capital, told Bloomberg: “Any fund that holds a large weight in a single stock, if there is selling of that fund, it will pressure the stock, and vice versa — especially on down days when bids tend to disappear. We are seeing heavy pressure in some of these names that had such a huge run last year.”

James Pillow, managing director at Moors & Cabot Inc., added: “High-flying stocks are great to own when there’s still wind beneath them. But when that breadth thrust is withdrawn because of liquidity, they often fall much faster than they rose. Holding such high fliers is a significant risk to concentrated portfolios, and frankly it’s a risk for the confidence in the entire stock market.”

Arthur Hogan, chief market strategist at National Securities Corp., concluded: “Tesla is the poster child for betting on a dream. When you start looking at things and saying, ‘This is going to be the greatest fill-in-the-blank ever,’ and then running up its valuation, you have to understand, there are no one-way trades. Trees don’t grow to the sky. So when something goes parabolic, it tends to come back down to Earth at some juncture.”

In other words, what goes up quickly, can come down even quicker. 

The 2020 gains in the NASDAQ were helped along by an artificial gamma squeeze created by the likes of Goldman and SoftBank

Now that the market is starting to discover pre-Softbank prices who knows how low the NASDAQ will retrace

Good chance much of 2020’s gains were artificial pic.twitter.com/nYBxxwopb0

— Quoth the Raven (@QTRResearch) March 5, 2021