A single tweet from Elon Musk can send a stock soaring. Traders should beware

Why worry about earnings growth and valuations when you can just plow your money into whatever “stonks” mega-billionaire Elon Musk happens to tweet about?

The Tesla (TSLA) and SpaceX CEO has boosted stocks and cryptocurrencies thanks to musings on his Twitter feed — which currently has more than 47 million followers. That’s raising concerns about whether or not unsophisticated investors risk losing their own money by blindly following Musk.

Shares of GameStop (GME) popped on January 27, one day after a Musk tweet that read simply “Gamestonk” and included an embedded link into Reddit’s WallStreetBets group. Polish video game developer CD Projekt Red spiked after Musk wrote a series of tweets on January 27 and 28 about the company’s bug-ridden Cyberpunk 2077 game.

Canadian e-commerce firm Shopify (SHOP) rose after Musk called it “great” and said SpaceX used it. (He didn’t say for what.) And Etsy (ETSY) moved higher after Musk wrote about buying something for his dog on the site. Speaking of canines, the price of crytpocurrency dogecoin spiked following positive Musk’s tweets. (The logo for Dogecoin, which was launched as a meme-inspired parody of cryptocurrencies, is a Shiba Inu, a Japanese hunting dog.)

And as if that’s not enough, bitcoin also got a boost last month after Musk added #bitcoin to his Twitter bio. The hashtag has since vanished; but bitcoin is still surging — in part due to Tesla’s decision to hold $1.5 billion of it on its corporate balance sheet.

A Tesla car sits parked at a Tesla Supercharger on September 23, 2020 in Petaluma, California. California Gov. Gavin Newsom signed an executive order directing the California Air Resources Board to establish regulations that would require all new cars and passenger trucks sold in the state to be zero-emission vehicles by 2035. Sales of internal combustion engines would be banned in the state after 2035. (Photo by Justin Sullivan/Getty Images)

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The cryptocurrency price moves, while extreme, might make more sense than the gains for stocks such as Etsy, Shopify and GameStop that Musk casually mentioned (or perhaps joked about?) After all, Musk in the past has expressed real support for bitcoin and other digital currencies.

“It’s a positive thing to have Musk and Tesla involved with cryptocurrencies and having this being a topic that is so widely discussed,” said Matt Blom, global head of sales trading for Diginex, which runs the EQUOS cryptocurrency exchange. “There is now a lot more interest in other coins.”

Some Musk tweets have been misinterpreted

Investors should be mindful that they risk getting burned if they assume that every cryptic Musk missive is a buy recommendation.

Last month, investors mistook a Musk tweet to “use Signal” – as in the privately held encrypted messaging service – as a reason to buy up shares of Signal Advance (SIGL), a tiny tech company that makes medical detection devices. Its stock promptly sank after the confusion cleared up.

Shares of a Canadian gold miner named Sandstorm (SAND) also briefly popped more than 50% in premarket trading on February 4 after Musk tweeted that “Sandstorm (SAND) is a masterpiece.”

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Musk didn’t elaborate, leading many on Twitter to speculate he may have been referring to the 1999 techno song “Sandstorm” by a DJ named Darude – and not the gold miner. (Even Darude tweeted about it.) The stock then pulled back.

So maybe, just maybe, investors shouldn’t use Musk’s Twitter ramblings as investment advice?

“This is reminiscent of the late 1990s, with a lot of retail interest in the markets. People have to be disciplined about what they own and why they own it,” said Matt Stucky, an equities portfolio manager at Northwestern Mutual Wealth Management Company.

“When stock prices detach from fundamental trends, it’s a cautious signal…Our investments aren’t the ones in the news because of Reddit and other headlines,” he added.

SEC may need to keep on eye on Musk’s latest tweets

Musk might have to be more careful about his choice of tweet topics as well. After all, he had a run-in with the Securities and Exchange Commission in 2018 after tweeting about plans to take Tesla private — which ultimately didn’t pan out at the time.

As part of a settlement with the SEC, Musk stepped down as Tesla chairman and the company’s board agreed to oversee his future communications with Tesla investors.

Skeptics might argue that Musk may be looking to pump up the prices of the investments he tweets about. But it’s not clear if Musk is in violation of his SEC agreement by continuing to tweet (even if just in passing) about other stocks and cryptocurrencies.

The SEC declined to comment to CNN Business when asked about Musk’s numerous stock and crypto-related tweets this year.

But spitballing about something on Twitter isn’t necessarily going to get Musk — or anyone else, for that matter — into legal trouble, said Ashley Ebersole, a partner with law firm Bryan Cave Leighton Paisner and a former SEC regulatory and enforcement attorney.

“You have a very vocal executive who enjoys putting out content on Twitter,” Ebersole said. “If there was evidence of nefarious intent to pump up the price of something, the SEC would look at that. But absent that, people are going to tweet and there is no agency responsible for policing Twitter.”

If Musk was being paid to promote or tout an investment and did not publicly disclose that, it would be a different matter, Ebersole said, but that does not appear to be the case with his recent tweets.

Of course, whether or not Musk should tweet as much as he does is an open question. Same goes for whether people should make investment decisions based on those tweets.