Good News for Apple and Tesla Could Be Bad News for the Overall Market

Last week saw two major news items, one on Apple (AAPL) and one on Tesla (TSLA). For Apple it was the news that the company became the first company ever to reach a market cap of $2 trillion. For Tesla it was the fact that company’s market cap had exceeded the market cap of Walmart (WMT).

When I saw the news on Apple, one of the first things I did was look up when the company exceeded $1 trillion in market cap. It was on August 28, 2018. That info jumped out at me because September ’18 was when we saw volatility start to increase and then we saw the huge selloff in the fourth quarter that year.

I did an interview with S&P Global on the matter last week with Anna Akins. As I told her, I’m not arguing whether Apple should be worth $2 trillion or not, if any company has that value right now it would be Apple. The company has seen tremendous earnings and revenue growth in recent years and it has an incredibly loyal clientele. My concern is that the entire market is overvalued right now.

For Tesla, the rise has been more meteoric as we have seen the stock price jump from below $400 in March to over $2,000 now. The company is doing a 5-for-1 stock split on August 31 with a record date of August 21. So if you owned the stock on August 21, you will be swapping one share for five shares and that will bring the stock price back down near the $400 level.

The issue I have with Tesla exceeding Walmart’s market cap concerns the two companies and their ability to generate revenue. No company in the world generates more revenue than Walmart—approximately $550 billion per year. Tesla is expected to generate revenue of almost $30 billion in 2020 and $40 billion in 2021. Walmart generates $30 billion in income in approximately 20 days when it takes Tesla a year to generate that amount of income.

My concern about these two news items is that they represent the overall thirst for speculative investments. One sentiment indicator for the overall market is flashing a warning sign right now too. The Investors Intelligence Bull/Bear ratio is at 3.59 currently and that is the highest reading we have seen since the beginning of 2018. That’s when the market fell after the trade war with China really got heated up.

If we look at the Tickeron scorecards for Apple and Tesla, both companies get a “strong buy” rating. These ratings are based primarily on technical analysis factors and both have three bullish signals on that side of the equation. Tesla has one bearish signal while Apple doesn’t have any bearish technical indicators.

The fundamentals are a much different story. Apple has four bullish indicators and only one bearish indicator. Tesla only has one bullish indicator and it has three bearish indicators on the fundamental side.

Looking at the fundamental analysis screener, the only negative mark for Apple is the Valuation Rating, meaning that the company is likely overvalued at this time. For Tesla it gets a score of 99 in the Valuation Rating. That is the worst possible score a stock can get. The company also gets a score of 99 in the SMR Rating category and once again that is the worst possible score. The other negative mark comes in the Seasonality Score where it shows a 75% chance of a decline.

On the technical analysis screener, the one negative indicator for Tesla is the Bollinger Bands. The stock moved above the upper band early last week. We also see that both Apple and Tesla have been overbought for a number of days based on their stochastic indicators and the RSI.

The stochastic indicators and the RSI in the screener are the daily ones, but if you look at the weekly and monthly ones, those are overbought as well.

I am not suggesting that investors should rush out and short Apple and Tesla. The bullish momentum is far too strong at this point in time. What I am suggesting is that the overall market may be setting up for a selloff because the optimism around the market is just too high, too euphoric. Apple’s market cap hitting $2 trillion could be a sign of overall market optimism. Tesla’s market cap could be a sign that investors are making riskier investments than they normally would.

Too much optimism is usually a sign of a market top.