Tesla (NASDAQ:TSLA) is doing the impossible. They have mounted the most legitimate assault by electric vehicles (EVs) on the dominance of internal combustion engine (ICE) yet. The numbers are still infinitesimal but the trend is clear. There is a strong consensus even among the industry experts that most of us will be driving EVs in the future. Nio (NYSE:NIO) and NIO stock are benefiting from the wave that TSLA created.
More recently, we also saw the emergence of Nikola (NASDAQ:NKLA) as another high profile company and potential contender in the EV space. All three stocks are up more than 200% year-to-date.
So far it’s been a wild ride indeed trading NIO stock. The price action just yesterday was evidence of that. It really gained notoriety back in February of 2019 when the TV show 60 Minutes aired a special report about the company during prime time hours. Unfortunately that dealt a giant blow to the bulls because after the initial spike, the stock collapsed from almost $11 to $1.20 in mere weeks.
After a tough slog and and 15 months, however, the bulls buried that ghost. They not only recovered that high but exceeded the initial public offering spike, setting a new all-time high.
Clearly the bulls are breathing a sigh of relief, but the question now is if they can sustain the momentum this time around. Today’s message is one of caution, so I am more bearish than bullish.
I assure you that I am not a hater, but I do have an issue with the stock price action. My last few articles on this stock have been positive, and after the one I shared in March the stock rallied 500%. I am a realist and I get cautious when the relative performance out-paces the changes in the facts. The sentiment flip in NIO stock came in sympathy from Tesla, not from enhancements in Nio’s outlook.
Nio Stock Charged For Action Soon
The short-term price action of late favors the bulls as they are buying the dips and setting higher-lows. But there is also a lower-high trend going on, so the trading range is tightening markedly. Usually when that happens the stock builds energy and will need to resolve itself in a big move. The direction of the move is yet to be known so it is best to watch for the triggers.
The bulls’ first opportunity sits just above $13 and even better above $13.60 per share. If they can do that, NIO stock can rally another $3 from there.
Conversely, if the bears can breach the ascending trend and close below $10.80 then they can perhaps close the two open gaps at $9.40 and $8. There will be support along the way but the bearish pattern is there if they want it. As much as I love technical trades, I suspect that the real move will probably come on the back of fundamental information. In a few weeks, NIO reports earnings again and management will have the chance to enlighten Wall Street on its state of affairs.
There have been tremendous macroeconomic risks so there are high odds of disappointment. Usually the absolute results don’t really matter because it’s the expectations that drive traders to act on headlines. Hopefully not too many investors expect good things in such a bad environment.
Tesla Success Is Not Transferable Without Cause
The short-term reaction to earnings is always more guessing than investing. Not even the company CEO can tell us which way the stock will trade after the report. Investors are finicky and they don’t really care about the absolutes. If at that time NIO stock continues to hold this high, it would then be vulnerable to selling the news. The Tesla earnings were fantastic and even it failed to hold its greens as it fell 18% from the spike. I fear that these high levels of expectations may result in similar reactions for NIO.
I don’t mean to dis the company, but Tesla is Tesla, and its success is not transmittable by osmosis to other EVs. There is a lot of that going on these days, especially with NIO and Nikola.
If investors are fans of what Tesla is doing they should just invest in TSLA stock. The largest factor of its success is Elon Musk. If I have profits in NIO stock I would protect them by selling covered calls or buying some put options. Doing both makes the protection strategy almost free.
Internal Combustion Engines Have the Edge over Electric
In the battle between ICE and EVs the edge goes to the noisy bunch. The coronavirus crisis caused a severe collapse in demand and oil took a massive tumble. This is important because cheaper oil weakens the argument for switching to electric propulsion. Add to it that the quarantine also gave birth to the work-from-home concept and it could become permanent, demand for driving is falling.
In addition, the current giants like Ford (NYSE:F) and General Motors (NYSE:GM) will fight back hard for EV market share. All these factors new and ongoing are headwinds to all auto manufacturers, especially the newer contenders like Nio.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.