Tesla Motors Inc (TSLA) Finally Peaking on Nasdaq-100 Inclusion

Historical research from Schaeffer’s shows that stocks entering the Nasdaq-100 shouldn’t be bought at that point. Typically the best stock to buy is the one leaving an index such as the Nasdaq-100. In the normal scenario, a company that leaves such a big index has faced a couple of weak years and the exclusion from the list places extra pressure on the stock: in essence, a catalyst that helps form a bottom.

In the current scenario,  is being added to the list while Oracle Corporation (NASDAQ:ORCL) is moving over to the NYSE effective July 15. In this case, the index isn’t providing the market with a removed stock to investigate for a purchase. It is though providing a major catalyst to help create a peak in Tesla Motors Inc (NASDAQ:TSLA). Ironically though, the price action of Oracle Corporation (NASDAQ:ORCL) would be ideal for a stock leaving the index to scoop up on the lows.

See the one-year chart below:

TSLA Total Return Price data by YCharts

Too much, too fast

Surging Tesla Motors Inc (NASDAQ:TSLA) has soared from below $40 when April ended to over $120 in around three months. The total gain in the last year is nearly 300%. Clearly investors need to be concerned about the stock moving up too much, too fast.

The producer of premium electric vehicles has hit huge momentum as surging oil prices make electric vehicles more attractive while surprising the market with some improved financials. Though the company reported a profit in Q1 2013, it ironically has seen analysts slash forward forecasts. In fact, the 2014 estimates have plunged in the last 90 days from $1.47 to only $0.86. Investors clearly doubted whether the company would ever turn profitable to ramp up the stock on declining expectations. Longs need to be concerned whether the higher stock price will find support if the company struggles to report strong earnings.

Any pop into the Nasdaq-100 inclusion could further strengthen the potential downside if the bubble ever pops.

Oracle removal

Removing Oracle Corporation (NASDAQ:ORCL) at the bottom sums up one of the biggest issues with indexes in general. While the enterprise software stock isn’t terribly volatile these days with a market cap over $140 billion, it is still trading at the low end of the range following an earnings warning back in June. The stock is only down about 15% from the highs, but it is closer to the yearly lows.