I’ve said repeatedly that Tesla (NASDAQ: TSLA) is too unpredictable to go long or short. The latest Tesla stock insanity in the market has been a short squeeze that has taken hold in recent months.
Here’s some perspective on just how crazy Tesla has gotten. It took Tesla about three years to get from $200 in early 2014 to $300 in early 2017. After that, it took the stock nearly another three years to get from $300 to $400 for the first time back in December. It then took Tesla shares less than a month to get from $400 to as high as $547.
At this point, Tesla stock is as wild and dangerous as ever, and every Tesla trader should be extremely cautious.
The Tesla Stock Squeeze
For any trader that’s not familiar with market dynamics, a short squeeze is one of the most powerful near-term market events. Typically, short-sellers make up a relatively small percentage of a stock’s overall trading volume. However, in recent years, Tesla has been one of the most heavily shorted stocks on Wall Street.
Any time a stock starts moving higher, momentum traders are going to step in and start buying as well. In Tesla’s case, that momentum was compounding by short-sellers buying up shares to exit their positions.
Mix in long-term investors buying to hold, short-term momentum traders attempting to swing trade and short-sellers buying shares to cover their positions and you have a flood of buying volume all at once.
However, when the dust finally settles and the short squeeze runs out of steam, buying volume from short-covering and momentum trading dries up all at once, and the stock typically comes crashing back down to earth.
Where Are the Fundamentals?
Six months ago, Tesla’s valuation was around $45 billion. Six months later, it is $91 billion. How many Tesla bulls actually think that the company is twice as valuable today as it was in July? Hindsight is 20/20. If the bulls are honest with themselves, they didn’t see a rally of this magnitude rally coming ahead of time.
Even analysts who are bullish on Tesla as a company have been forced to downgrade the stock.
Just this week, Morgan Stanley analyst Adam Jonas downgraded Tesla from “equal-weight” to “underweight.” In the downgrade note, Jonas didn’t talk about trouble ahead for Tesla’s business. He talked more about the fact that little has changed about the Tesla bull case in recent months. Meanwhile, the stock has doubled.
“We are encouraged by Tesla’s execution and think it deserves to be among the world’s most valuable auto companies, and is perhaps the most important auto company in the world given its EV leadership. However, we think investors will be presented with more attractive opportunities to own the stock in the future,” Jonas said.
In other words, Tesla is a great company. But you’d have to be nuts to pay $500 per share for Tesla stock.
How to Trade the Short Squeeze
I have never bought or sold short a single share of Tesla stock. For years, Tesla has traded on the whims of media coverage, investor sentiment and head-scratching projections on behalf of the company’s management. I’ve repeatedly said Tesla is overvalued on a fundamental basis. But its cult-like horde of followers coupled with its massive outstanding short position make the stock a very dangerous short.
The obvious trade is to short the squeeze. Short squeezes are temporary market phenomena, and they never last too long. But the problem comes with predicting exactly when they end. When a stock begins to move parabolically, the gains start happening faster and faster.
It took Tesla roughly a month to move from $400 to $500. It’s not unreasonable to think it could hit $600 in the next two weeks and $700 a week after that. While shares are almost certainly headed back below $450 eventually, there’s no guarantee that shorting at this point won’t result in heavy near-term losses if the squeeze continues.
But if you are a Tesla bear and you are brave enough to try to trade the stock, here’s what I would recommend. Take a small short position now and add to your position ahead of earnings on Jan. 29.
Tesla is a historically volatile and unpredictable earnings stock. Tesla bulls sitting on 100% gains over the past six months will likely take profits ahead of earnings rather than risk a huge sell-off.
I don’t know what Tesla will report, but the reality is that it doesn’t matter. At this point, Tesla stock has become a day trading instrument that is completely detached from company fundamentals. If you’re attempting to trade the stock, my biggest piece of advice is to simply be careful.
As of this writing, Wayne Duggan held no positions in the aforementioned securities.