Shares of electric carmaker Tesla Inc (NASDAQ:TSLA) reached record highs this week, turning a seven-week rally into an eight-week advance. TSLA stock is now up 33% from its early March low.
The momentum is impressive, to say the least.
On the flipside, given some of the rhetoric that has surfaced this week, it would be easy to fear the big rally is nothing more than a setup for a big wave of profit-taking.
Namely, Pacific Crest analysts Brad Erickson and Elliot Arnson expressed doubts that Tesla would be able to reduce its production costs enough to make the Model 3 a fruitful venture. And Kevin O’Leary — you know him better as Mr. Wonderful on TV’s Shark Tank — suggested Tesla stock could fall between 30% and 40% from this week’s highs.
The outlooks sound grim, particularly given O’Leary’s assessment. Ironically, however, his bearish rationale is the very reason to not yet bet against TSLA stock.
A Wall of Worry
It’s something yours truly has said before, but it bears repeating now: Tesla isn’t an investment in an electric car company, nor is it (now) and investment in a solar panel maker. Buying TSLA stock is an investment in a premise, or a gamble, on what the market will think of cool electric cars six months to two years down the road.
You have to play that game of psychological chess if you want to have any shot at making any sense of, or making any money with, Tesla stock.
As it turns out, Kevin O’Leary sees things in a similar light. On Monday he commented:
“I’d argue there’s a 30-40% downside in Tesla’s stock. There are going to be self-driving cars manufactured by many companies. Tesla is the first and perhaps the best brand known, but if I were putting money to work today into this space, it probably wouldn’t be in Tesla because it doesn’t fit any of the criteria that I look at in terms of derisking my portfolio… It’s a cult stock. If I’m looking at the automotive sector, why would I pay this valuation for basically a car company?”
Valid points all around. But there’s one thing he said that’s not only true, but also relevant. That is, TSLA stock is a cult stock, and because it’s a cult stock, one has to respect the psychological baggage that always comes with it.
In this case, the underlying psychology is simple: Tesla isn’t going to roll over until nobody — nobody — expects it to. In the meantime, it will climb the wall of worry being built by O’Leary, Pacific Crest and others.
Welcome to the art of trading. Expect it when it makes the least sense, and don’t expect it when it makes the most sense.
That’s not to say Tesla stock can’t pull back to some degree before moving to higher highs. Mr. Wonderful’s expectations for a 30%-40% setback, however, just doesn’t stand up to even more tried-and-true insight from John Keynes:
“The market can stay irrational longer than you can stay solvent.”
Further gains from Tesla stock not be rational, but in that it’s a cult stock with a strong following and a lot of news to tout here, nobody can afford to step in front of the train.
Looking Ahead for TSLA Stock
With that backdrop being established, where might Tesla shares be headed next?
We can actually feed off of the technical analysis I laid out back on March 30. The ceiling at $286 has been broken as described a little over a month ago, and sure enough, it took flight.
As for just how far this rally might extend, it’s difficult to say simply because there are no prior peaks or troughs to use as technical context. In cases like this where we’re in uncharted waters, the most applicable tool at our disposal are Fibonacci extension lines. There’s no room to share the idea here; Google “Fibonacci extension” for the Q&D explanation. Just know that Tesla’s next Fibonacci extension line based on the $178/$286 trading range is at $356. The next one lies at $398. Either could put a cap on the rally.
Of the two, the upper one at $398 actually makes the most sense as the top. A move to that area would mean a $111 move above that big ceiling at $286, and the range Tesla stock used to be stuck in covered a similarly sized span between $178 and $286. Generally speaking, a stock that breaks out of a trading range tends to travel the same distance as the height of that range.
Don’t get married to the idea. TSLA shares could stall at $356, or run to $466, or roll over at any point between here and there. To the extent a target can be set, though, $398 is the best place to pencil in a potential peak.
More than anything, current owners don’t need to worry about a big pullback until everyone is singing the same bullish chorus. That’s not what we have right now. And this is coming from a guy who’s made a point of trying to keep TSLA stock off the market’s pedestal.
Tesla will report last quarter’s numbers after Wednesday’s close. A strong move one way or another is likely in the cards. But even if the knee-jerk reaction is bearish, the bigger-picture undertow is still more than bullish enough to rekindle the rally before it’s quelled.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
