Shares of Tesla (NASDAQ:TSLA) have been a bright spot in an otherwise very difficult stock market over the past month. After making a pre-earnings low of $260 on Oct. 19, Tesla stock has rallied more than 90 points, or 35%, closing at $353.47 yesterday. In comparison, the S&P 500 has dropped roughly 3% in that same time frame.
Much of the rally has been predicated on the euphoria surrounding the massive earnings beat in Q3. It’s important to remember that much of that beat (nearly $190 million) came from selling ZEV credits and not from car production. Compare that to a year ago, when Tesla reported only $20 million in ZEV credits. In essence, Tesla raided the cookie jar for $170 million more in ZEV credits this past quarter to boost earnings and revenues. Strip away the credits and Q3 earnings were only 55 cents compared to the $2.90 that was reported. Still positive, but not nearly as impressive.
CEO Elon Musk has used a similar tactic with another company he runs-SpaceX. Bloomberg reports that disclosures to potential investors stated positive earnings over the past 12 months of roughly $270 million.
Those earnings, though, included amounts customers had pre-paid and failed to include costs for research and development. Without these “adjustments”, earnings would have been negative. It’s certainly not the quality of earnings that provides long-term confidence.
Where Tesla Stock Stands Today
Tesla stock is looking extremely toppy from a technical perspective. TSLA once again failed to break out past the critical resistance level of $360, marking the fifth time this year shares stalled out at this price point. The MACD also has similarly reached an extreme before weakening, another reliable indication that the rally has become overextended. Any further weakness in Tesla stock will generate a MACD sell signal, likely pushing the stock even lower.
Most importantly from a technical standpoint, Tesla had a key reversal day yesterday. Shares traded up to new recent highs at $366.75 intra-day before reversing course sharply to close near the lows of the day at $353.47. This doji candlestick pattern is a sign that the buyers have finally become exhausted, especially after such a monster rally. Factor in that this drop took the stock back below the critical resistance area at $360 and the reversal becomes even more meaningful.
Many analysts, including those from Goldman Sachs, J.P. Morgan and Bank of America/Merrill Lynch, still have a sell rating on Tesla stock even after the surprise earnings beat. They feel this may be as good as it gets for Tesla stock, especially given the valuation and the phasing out of the Federal Tax (ZEV) credits beginning in 2019.
Now that Tesla is now back near all-time highs following a monster rally, investors and traders alike may want to follow the experts and short TSLA at current levels.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
