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The trouble with Tesla

The meteoric rise in Tesla’s shares highlights the dangers of a short squeeze
The trouble with Tesla

Tesla (US:TSLA) is a company lots of investors love to hate, along with its controversial founder, Elon Musk. Perhaps the biggest controversy was the famous “funding secured” tweet, which moved the market in 2018. Everyone expected Elon Musk to take advantage of market froth and place equity into the price appreciation he had created with his tweet. And then everyone said he was a fool because he didn’t – everyone apart from the Securities and Exchange Commission (SEC), which slapped him with a massive fine. But Elon Musk is currently the world’s seventh richest person, boosted past Warren Buffett on the Bloomberg Billionaires Index. 

Personally, if I’d received a $20m fine, I’d almost certainly be in tears and bankrupt – yet chief executive Musk has said the tweet that cost both himself and shareholders of the company $20m was “worth it”. Some of the best value-creating companies on the planet have icons – such as Steve Jobs of Apple, Jeff Bezos of Amazon, Sam Walton of Walmart – and some of these rubbed people up the wrong way as disrupters. But to the best of my knowledge none of them committed market abuse, had their shareholders fined, and gloated about it as though it was an insignificant parking ticket. 

But no matter how much controversy the electric carmaker attracts, somehow its shares keep on ascending like one of Mr Musk’s rockets. And no matter how angry the shorters get they cannot stop it hitting stratospheric new highs. There is talk that the company could report a fourth consecutive quarter of generally accepted accounting principles (GAAP) profits later this month, which would allow it to be considered for inclusion in the S&P 500. 

A company’s stock price is the money-weighted sum of opinions. And Tesla is a cult. At a price of $1,751 per share Tesla’s market cap is worth more than the collective sum of the next three largest automakers in the world: Toyota, Volkswagen and Honda. It’s a great story, and one people can get behind: Tesla creates electric cars, which will save the planet from deadly fossil fuels and also provide us with clean energy. 

As many as 40,000 Robinhood users bought the stock in less than four hours on Monday 13 July, with Tesla stock climbing 16 per cent before giving up its gains. Such volatility is incredible, and shows the differences in opinion about the stock’s fundamentals – although users of Robinhood, an online brokerage, are hardly known for their discerning analysis. In October of last year, the stock traded below $250 and was said to be overvalued, but despite this we saw one of the most epic short squeezes I’ve ever seen in my career. Short squeezes are fascinating to watch and participate in (so long as you’re on the long side), and this move almost certainly blew up many retail traders and institutions. 

If we look at Chart 1, we can see the stock gapped up on larger than average volume. It didn’t pull back much, and eventually began to grind higher in December 2019, beginning the squeeze. Many shorters will have been assuming that the stock would pull back and ‘reality’ would set in. But unfortunately for them when traders sniff any scent of a squeeze then it’s like blood in the water to a shark.

This is why squeezes are dangerous for the shorter, because other traders will actively try to put more pressure on shorts by deliberating buying and announcing a squeeze for all to hear. We saw an example recently in Tomco Energy (TOM) – the company had announced a placing to the market and a few days later had decided to pull it. This meant that those who had forward sold – that is, sell before the stock is delivered or settled – now had to settle their obligation to return the stock that they had sold. This is why forward selling can be dangerous, because until you receive the stock you have sold, you are actually net short, rather than selling placing stock you have had delivered for a quick profit. 

When the regulatory news service announcement came through that the company had pulled the placing, I knew immediately that there were likely to be punters who had thought they could flip the stock for a few quid but would now be quaking in their boots. I asked my broker to buy with a high limit order, because if those shorters need to close, then I would do my best to drive the price up (and profit from their misery). As the old saying goes: “He who sells what isn’t his’n, must buy it back or go to prison.” On both Twitter and the bulletin boards, the vultures were circling. Unfortunately, I wasn’t filled as I was outbid, and the stock rose 200 per cent. This is the power of the squeeze. 

Regarding Chart 1, we can see the blow-off move in the Tesla squeeze in February, only for the stock to rapidly plummet within weeks. 

Chart 2 shows another high momentum move in recent weeks. The stock flirted around $1,000, and once it broke this key all-time high area it stormed onwards – hitting $1,800 in just a few sessions. I don’t trade US stocks, but looking at these charts it does make me envious of those who trade across the pond. It is rare we get such explosive moves in UK stocks unless one moves to the depths of Aim.

We can see the stock gently consolidate over a few weeks before popping and breaking upwards. When we see stocks decline in both volume and volatility, that is often the precursor to a much larger move. Whenever you see this pattern, keep a close eye out - you just might have landed on what could be a monster move. 


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