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SPI

This Classic Sign of a Stock Market Top Just Happened

The stock market had a tumultuous Wednesday, falling prey to a late-day plunge that sent major market benchmarks down 2% to 3%. Coming just a day after a solid rebound from recent declines, the market's downward movement has a lot of investors nervous about whether we've seen a market top. The Dow Jones Industrial Average (DJINDICES: ^DJI) held up the best of the three major indexes, while the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite were down more sharply.

Today's stock market

Index

Percentage Change

Point Change

Dow

(1.92%)

(525)

S&P 500

(2.37%)

(79)

Nasdaq Composite

(3.02%)

(331)

Data source: Yahoo! Finance.

Skeptical investors are always on the lookout for signs that the market has gotten frothy. Today, market participants saw a classic instance of such a phenomenon, serving as a reminder of similar occurrences at the beginning of past plunges in the financial markets.

The story of SPI Energy

SPI Energy (NASDAQ: SPI) isn't a familiar name to most investors. That's largely for the best, because before Wednesday, there wasn't anything terribly noteworthy about the stock.

SPI was founded in 2006, with the intent of providing photovoltaic solutions for solar power systems. SPI moved its headquarters to China in 2015, pivoting to become a green-energy-focused internet company. It started trading on the Nasdaq in early 2016.

Grid of 20 solar panels on a roof, with sunny sky above.

Image source: Getty Images.

From there, things largely went downhill for SPI. The stock fell by more than half in its first two weeks of trading on the Nasdaq. A long downtrend forced the company to do 1-for-10 reverse splits on two occasions, once in late 2017 and again toward the end of 2018. Even with those moves, SPI's stock fell below $1 per share in March 2020, eventually prompting a delisting notice from the Nasdaq.

SPI managed to avoid getting kicked off the stock exchange. However, the share price remained perilously close to the $1 level.

That is, until today.

Getting into the next big thing

SPI Energy announced Wednesday that it had created a new subsidiary. EdisonFuture's purpose will be to design and develop electric vehicles and charging technology for EVs.

CEO Xiaofeng Peng said all the right things in explaining the move. "As Tesla has demonstrated, an end-to-end business model in the renewable energy space can generate significant value." Peng believes that EdisonFuture can help SPI become better positioned "for the future of renewable energy."

Investors go berserk

EV technology is all the rage right now, so as you can imagine, shareholders were ecstatic about the news. The stock soared from $1.03 per share all the way to $46.67, briefly giving the company a market capitalization of nearly $700 million.

SPI then saw huge fluctuations. By the end of the day, its stock was back down to $14 per share. That was still good for a more than 1,250% rise, but it meant that some unfortunate buyers of the stock had lost 70% of their money in just hours.

How is this a classic sign of a market top? We've seen similar things happen before:

  • During the dot-com era, even non-tech companies did their best to connect themselves to the internet by changing their business models and adopting tech-sounding names.
  • When bitcoin exploded higher, many companies tried to integrate blockchain services into their businesses in an effort to exploit interest in cryptocurrencies.
  • Marijuana investing's heyday featured many companies making shifts to try to appeal to the cannabis community.

In all of those cases, new entrants had success for a while. Eventually, though, investors moved on to the next fad. Not all of those companies became worthless -- but many did.

Investors have to understand that the stock market only reflects a company's true value in its share price over the long run. During brief periods of time, anything can happen. SPI's big move higher is a reminder that investors have to be vigilant in avoiding getting caught up in hype.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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