Tesla’s stock is hot. But hotter than Tesla’s stock is investors’ imagination.
The shares TSLA, +20.93% have become a vessel in which investors transferred their futuristic fantasies. It started during last quarter’s earnings report, which was a game changer. Tesla said it would make more than half a million cars in 2020 as it “has grown to the point of being self-funding.”
Since it is imagination that investors are trading on, there are no restrictions and no constraints. Isn’t it, say, a matter of time before Tesla makes millions of cars a year? Many investors have conviction that it will. Aren’t there too many variables to jump from half a million to many millions? No problem, just add perfect foresight to the conviction.
Let us not forget about advances in autonomous cars by Tesla, robo taxis, solar roofs and batteries. Could flying taxis from Tesla become our favorite mode of transportation? The sky’s the limit.
Tesla is so far ahead that nobody else can possibly catch up. It is a matter of time before everything around us is Tesla, or so the story goes. All that is great, but what about Tesla’s stock price 10 years from now? Tesla will be bigger than any other company, right?
I must admit that I do not have the wisdom, conviction and foresight of Tesla investors. Back in 2018, I could see Tesla’s stock going to $1,000, but there was also potential for it to go to $60. Please see “Ignore the drama at Tesla and focus on the stock’s price zones to make money.”
It is said that “there’s many a slip ’twixt the cup and the lip.”
However, I do have insights derived from proven algorithms and decades in the markets about the recent move in Tesla stock.
Let’s take a more rational look at Tesla with the help of a couple charts.
Please click here for an annotated intraday chart of Tesla’s stock.
Please click here for an annotated day chart of Tesla’s stock.
Note the following:
• The first chart shows four price zones in which new short-selling positions were started. (Short-selling is a wager on a decline in securities prices.)
• The first chart shows three zones in which new short positions were closed.
• Investors need to understand that short squeezes are dynamic. In plain English, there are waves of new shorts being established and there are waves of shorts being squeezed, and either can be forced or feel compelled to close short positions.
• A short squeeze occurs when short sellers are either forced or willing to close a position at any price. This leads to significant artificial buying that is extremely aggressive in nature. Such buying causes stock prices to leap by extraordinary amounts.
• The first chart shows the VUD indicator. The VUD indicator is the most sensitive measure of net supply and demand in real time.
• The VUD indicator (in green) on the first chart shows aggressive net buying.
• The VUD indicator pattern shown on the first chart, when combined with price action, is the telltale sign of a massive short squeeze. Note that a similar pattern can occur after major news such as buyout rumors, blowout earnings, management changes and clinical trial results. But no such thing was happening in Tesla at the time this pattern was traced.
• The second chart shows three short-squeeze legs in Tesla stock.
• The last leg of the short squeeze shown on the second chart is the most vicious one so far.
• It is not uncommon for the short squeeze to peter out after the most vicious leg of a short squeeze, but this does not always occur.
• The second chart shows only three short-squeeze legs have occurred so far in Tesla’s stock. There have been many cases of other stocks throughout history where as many as 10 short-squeeze legs occurred.
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The media are touting huge losses for short sellers in Tesla’s stock. The “huge losses” part is correct. However, the dollar amounts touted are vastly exaggerated. Short sellers are not dummies; they tend to be intelligent and sophisticated. Typically, they have stops to control losses. They use trade-around positions. Sometimes they have hedges.
Paradoxically, the higher Tesla stock goes, the more tempting it is for short sellers to establish new short positions.
What is Tesla really worth?
What is the fair value of Tesla’s stock today? Should investors buy or short the stock? What is the 10-year target for Tesla? How far ahead is Tesla compared with the competition? Can the competition even catch up? Will Tesla beat the Dow Jones Industrial Average DJIA, +1.56% over 10 years and by how much? Are there short-term trades here?
These are all good questions. I will answer them in future columns.
For now, suffice it to say that the recent move in Tesla would have not occurred without a vicious short squeeze. A further move up is not likely without another short-squeeze leg. At the same time, it is important to note the following:
• There is a fair amount of real buying in Tesla’s stock.
• It is not only retail investors; institutional investors seem to be jumping in.
• Part of the move seems to be driven by ESG (environmental, social and governance) investors. There is a scarcity of stocks to invest in electric vehicles. (Nio NIO, +11.08% is another.)
• FOMO (fear of missing out) is taking over.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.