Time For Tesla Shorts To Smell The Coffee

| About: Tesla, Inc. (TSLA)
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Summary

Andrew McElroy's recent article explores Tesla's technical market position. One conclusion: increasingly irrational, emotional investors have failed to drive the stock higher, presaging a tumble for Tesla.

The high level of Tesla short interest and greatly increased, emotion-charged negative comments on SA articles on the company suggests a different conclusion.

Mr. McElroy's argues for there being many emotional Tesla investors. Volume of recent negative Tesla comments suggests many of these emotional, speculative investors are short, not long.

The narrowing Tesla trading range suggests reality will soon overcome emotion. If driving emotion is on the "short" side, the stock could move up as a result.

Tesla (NASDAQ:TSLA) is, and has historically been, a very volatile stock. Investors hold opinions often grounded in beliefs about the company's vision, climate change, energy independence, and CEO charisma more than in cold company financials. Emotional and arguably irrational views of the company are held by both long and short investors, and this article will not seek to establish which side's belief system is correct. Instead, we will explore how special market circumstances relating to Tesla apply to a recent technical analysis of TSLA presented in Mr. Andrew McElroy's recent Seeking Alpha article.

Tesla Model S, rear view

Tesla Model S - Author

Mr. McElroy offers a technical analysis of TSLA market activity and observes an oscillatory price behavior that has decayed in amplitude over several cycles, and which appears to rest on a "floor" around $195. He attributes this price behavior of multiple excursions of diminishing size to market drivers on the long side shifting from the smart money to less-than-smart money to emotional money.

In a more conventional stock, this argument makes sense and reflects conventional wisdom as to how markets operate. In the case of TSLA, though, conventional wisdom may not be telling the entire story. Short selling and option trading are generally the pursuit of sophisticated investors - presumably the "smart money". Small investors that stick to simple long investment in the stock are thought to be less sophisticated - that is the "emotional money". In the context of small, unsophisticated long investors driving the stock towards the end of a series of decaying price oscillations, the explanation Mr. McElroy presents is entirely reasonable.

Tesla may at this point in time, however, represent a quite different case. The stock is heavily shorted. Short interest tracking service Short Squeeze, at the time I am writing, shows 27,707,100 shares of TSLA shorted, i.e., 23.7% of the float. And there is indication this shorting activity may now be driven to some degree by emotional investors.

In recent weeks, the volume of negative Tesla comments on Seeking Alpha articles has increased, and the nature of comments and commenters have changed in subtle but recognizable ways. As an example, I offer the Seeking Alpha commenter Model S Owner - It's Not That Great. This commenter who describes themselves as "Hedge Fund Manager, Developed International Markets, Dividend stock ideas & income" posted a first comment September 14, 2016, and as of this writing, has commented 1,879 times on Seeking Alpha articles, writing in excess of a quarter million words - that's one comment on average every 32 minutes, 24 hours a day, 7 days a week. Virtually all are negative comments directed toward Tesla. This is an example of exceptional effort, the commenter having written more words than John Steinbeck's "East of Eden" in just 41 days.

A perusal of comments on most any recent Seeking Alpha article about or relating to Tesla will see other prominent, repetitious efforts by increasingly ardent TSLA shorts expounding their dislike of the company, disdain of Tesla's CEO, the government, environmentalists, and so on.

It is not my purpose to dispute the views of negative Tesla commenters, who are, of course, entitled to their respective opinions. The point I would make is that we are seeing much greater volume of short side comments that are notably more strident and emotional than in the past.

This would suggest that perhaps a lot of the "emotional money" is now on the short side. And that, if it is the case, would stand Mr. McElroy's argument on its head. If what we are indeed seeing is a shift from smart money to emotionally driven investors on the short side of TSLA, it could portend a imminent break, not downward, but upward in the price of the stock.

Going into Tesla earnings Wednesday afternoon, the possibility that the "emotional money" has moved to the short side is something investors may want to keep in mind.

Disclosure: I am/we are long TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: These writings about Tesla, its cars, manufacturing, technology, markets, competitors and the like are intended to stimulate awareness and discussion of these issues. Investors should view my work in this light and seek other component advice on the subject issues before making investment decisions.