Facebook has something in common with Tesla. Here's what it is.
What does electric carmaker Tesla have in common with social media giant Facebook?
Well, if you take a look at one chart, a whole lot.
Tesla and social media companies like Facebook, Yelp, Pandora, and the like are all momentum stocks. That is basically a polite way of calling them highflyers.
Calling social media stocks hot this year is an understatement. The most popular tracking ETFs for that group –the Global X Social Media Index ETF (the SOCL) – is up 48%. Besides the expected American sites in that space such as Twitter and LinkedIn, it also includes Chinese internet companies like Tencent and SINA.
Here's where it gets interesting: Chart the ratio of the SOCL versus the S&P 500 index since July. This shows the relative price of the sector versus the general market. Take that chart and overlay it on top of a chart of Tesla during that same time period and you'll see how closely they moved together.
That's exactly what Steve Cortes, founder of Veracruz TJM, did with this result:
That doesn't mean Tesla will now post your photos from your Aruba vacation or that Facebook will now make cars.
"The decline in Tesla is a leading indicator that momentum stocks in general are in trouble, particularly those of a social media variety," says Cortes, who is long-term optimistic on Tesla. "I am short the SOCL largely based on this correlation. I think Tesla is a leading indicator telling us that momentum is in trouble."
According to CNBC contributor Gina Sanchez, founder of Chantico Global, the underlying fundamentals are a cause for concern with social media stocks.
"If you look at the components of the social media index, many of them are extremely highly valued, which is one thing they share in common with Tesla," says Sanchez. "Tesla is trading at spectacular [price to earnings ratios] – over 80 times. You have parts of the social media index that are trading at 1,250 times or 700 times."
"Even Facebook is over 100 times," notes Sanchez. "As momentum is threatened in any way, then you're going to see an incredible response in these kinds of companies. And, this particular ETF has a lot of them."
To see more of the analyses by Cortes and Sanchez on momentum stocks, watch the video above.
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