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Tesla Inc (TSLA) Stock Tacks on Another Bullish Driver: China

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Tesla Inc (NASDAQ:TSLA) has now rallied by a little more than 75% on the year, and it has nearly doubled since early December. Somehow, that hasn’t blunted the skeptics in TSLA stock, as shorts keep (unsucessfully) trying to bet against Elon Musk & Co.

Tesla Inc (TSLA) Stock Tacks on Another Bullish Driver: China
Tesla Inc (TSLA) Stock Tacks on Another Bullish Driver: China

Source: Shutterstock

That continued on Tuesday after Bloomberg reported that Tesla is close to a deal that would see the electric vehicle company build production facilities in Shanghai. TSLA already generates about a billion dollars in annual revenues from China, and building within the country would help Tesla avoid a 25% tax that renders its vehicles far too expensive compared to domestic competition.

The news sent TSLA stock about 2% higher initially on Tuesday before pulling back to fractional gains, but still keeping up the stock’s outstanding year-to-date run.

And Tesla is going even higher.

I don’t necessarily agree with the notion that Tesla will hit $1,000 per share, mind you. I think that’s a little farfetched. But it will continue to rise over the long-term.

The question is, is now the time to buy Tesla stock?

Why Is Tesla Going Higher?

Do you know Joseph Fahmy? If not, @Jfahmy is a great follow on Twitter. One thing Mr. Fahmy has taught me over the years is to block out the noise and focus — focus on how leading stocks behave.

Do they bounce back quickly on pullbacks? Do they hold up well relative to their peers and other indices? In the case of TSLA stock, it traded like a champ amid broader weakness in tech, and that bodes well for long-term bulls.

Valuation? There are a million different ways to value Tesla, but it’s all irrelevant because Tesla simply does not trade on valuation. If you care, though, it’s expensive by price-to-sales, price-to-earnings (well, future earnings), price-to-EBITDA and just about every other metric you can evaluate.

But how did it do when the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) took a two-day beating on June 9 and June 13? You know, the selloff that tore down favorites like Facebook Inc (NASDAQ:FB) and Amazon.com, Inc. (NASDAQ:AMZN)?

Tesla didn’t stand up straight, but it wasn’t exactly bowled over, either.

From Thursday’s close to Monday’s dead lows, shares fell about 4.75%. By Monday’s close you’d see a stock down just 2.7%. Shares have risen back above the $370 level ever since, where they reside today, trying to mount an attack on the $400 level.

The Shorts Are Feeling the Pressure

In the stock market, egos and dollars are on the line, which makes for quite the bull/bear battle.

Famed short-sellers like Jim Chanos and David Einhorn (which runs Greenlight Capital) are short Tesla. In most other stocks, this duo would be highly feared. But right now, they’re both getting badly squeezed. Greenlight Capital’s letter to shareholders spells it out clearly when referring to bubble stocks like Tesla: “these stocks are back in full-blown momentum mode.”

And despite its successes, Tesla carries a short interest of roughly 25%. People can keep initiating new short bets against TSLA stock all they want, but if it keeps rising — or even holds steady — the pressure will increase. And any time a bullish driver sends Tesla a little higher, there’s always the potential that the bears will cry “uncle” and start unwinding their positions … by buying shares, keeping up the virtuous cycle of the short squeeze.

With the stock near all-time highs, 99% of short sellers are underwater. Had one shorted a month ago, they’d be down 20%. If they had sold short three months ago and are still in it, they’re sitting on nearly 43% losses.

Model 3

Tesla shares also should enjoy increased excitement as Model 3 production nears and eventually gets under way in July — at least assuming that the broader market holds up. In fact, a broad-market decline seems to be about the only thing that can take down Tesla until it screws up on its own.

Investors are drooling over the possibilities of the more mass-market Model 3 … nevermind the immense cash burn, stock dilution or near-impossible production assumptions.

Of course, hype often gives way to a “sell the news” moment. Perhaps Tesla’s stop will come once Model 3s start rolling out the door?

Most Signs Point to Buying TSLA Stock, Right?

I love Tesla’s products. I love Elon Musk.

I don’t love Tesla stock.

A near-doubler inside of eight months with nary an annual profit in sight is not my cup of tea. And as if Tesla’s cash burn weren’t bad enough, it’s also dealing with absorbing SolarCity and its money-losing operations.

TSLA stock chart
TSLA stock chart

TSLA stock is surprisingly not overbought by the Relative Strength Index (RSI), but the MACD indicator down below shows that momentum could exhaust itself at any moment.

Worrisome is Tesla’s move today. After jumping out to a big move higher, shares continue to balk at the $370 level.

That doesn’t mean Tesla can’t go higher, nor does it necessarily mean the stock will suddenly throttle back. Most likely, if you ask me, is some consolidation as it digests the past month or so of gains.

Right now, my suggestion is to wait it out for a pullback. TSLA stock is pure insanity right now, so it could very well burn all patient investors and go rocketing toward $400. But for now, the odds say that you’ll have another chance to buy the dip before the summer is out.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

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