One Indicator to Watch to Signal When Tesla’s Parabolic Surge May be Ending
Matt Weller, CFA, CMT February 4, 2020 5:03 PM
There are certainly financial topics impacting more individuals and bigger companies, but there’s arguably nothing more fascinating happening in markets than the parabolic explosion taking place in shares of Tesla (TSLA). CEO Elon Musk’s provocative electronic car company is perpetually creating headlines, but the even against that backdrop, the stock’s surge is still astounding.
Below, we highlight a couple of the most fascinating statistics on the move:
- Tesla is trading up 115% year-to-date, 271% from the Cybertruck “bricked launch” in late November, and 400% from the low set last June.
- At over $160B, Tesla has a higher market capitalization than rivals GM, Ford, Fiat Chrysler, and Daimler…combined!
- After this morning’s surge, Tesla (-$862M in “profit” last year) market capitalization has exceeded that of McDonalds ($6B in profit last year) and Nike ($17.4B in profit last year).
Source: TradingView, GAIN Capital.
So what’s driving the surge?
At the most basic level, the situation is a textbook “short squeeze,” albeit on an unprecedented scale. Midway through last year, approximately 25% of Tesla’s shares outstanding were sold short, meaning that traders were betting that they’d go down. As prices began to rise, some of those traders were forced to close their short positions and buy the stock back. This in turn pushed prices up further, forcing more short sellers to buy the stock, pushing prices to rise yet further and so on.
With any parabolic market move, the question isn’t whether it’s reasonable, but where it will stop. After all, in the words of the great John Maynard Keynes, “markets can stay irrational longer than you can stay solvent.” As of writing, 13% of shares are still held short, so there’s still plenty of fuel for further gains, even if the stock ultimately settles lower than current levels.
During this type of sentiment- and positioning-driven move, traditional forms of technical and fundamental analysis tend to lost their effectiveness, but one signal we’ll be watching for a sign that the rally is ready to reverse is the peak-to-trough drawdown. Since Tesla eclipsed its previous record high and started the true parabolic phase of its rally in mid-December, the stock hasn’t seen a peak-to-trough drawdown greater than 5% on a closing basis.
Accordingly, when TSLA does see a closing drawdown of greater than 5%, it will represent a change in the character of the move, whether that occurs later today or after the stock surges to $2,000. At that point, bears could have more confidence that a sustainable reversion to more sensible levels may be at hand. While this methodology is far from foolproof or guaranteed, it can help bullish traders limit their risk and allow bearish traders to potentially put the odds in their favor.
Disclaimer: GAIN Capital UK Limited (trading as "Forex.com") is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, Forex.com does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by Forex.com or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although Forex.com is not specifically prevented from dealing before providing this material, Forex.com does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
For further details see our full non-independent research disclaimer and quarterly summary.