How to Trade the Tesla Soap Opera
You can’t say I didn’t warn you…
More than a month ago, we took note that Tesla Inc. (NASDAQ:TSLA) stock was charging back above $300 and consolidating near its 2018 highs.
With production goals met and Elon Musk taunting short sellers, we were paying close attention. After all, a quick squeeze could easily push the stock to 52-week highs.
Sure, Elon’s behavior has been more than a little erratic, matching some of the wild swings we’ve witnessed in heavily-shorted Tesla shares. His antics have even contributed to some volatility in the stock — most notably when the CEO abruptly cut off Wall Street analysts during a conference call back in May and instead turned to YouTube questions from retail investors.
At the time, the move drew sharp criticism from analysts and the financial media, who described the call as bonkers.
But the party was just getting started.
Elon decided the recent excitement wasn’t enough for him. So he took to Twitter again yesterday to declare that he was considering taking Tesla private at $420 — a premium of more than 20%.
Never mind that the exchange should halt trading in the stock for an announcement like this, which would normally hit the wire via press release. If we know anything about Elon Musk, it’s that he loves roasting the shorts.
And that’s exactly what happened. Tesla shares exploded on the news. Following an afternoon halt (finally), the stock pushed higher by almost 11% by the closing bell, just a few bucks shy of its 52-week highs.
Most serious financial pundits were stunned by the announcement. After all, Musk made a huge claim in a public forum when he declared that the funding is secured to take the company private. If that’s not true, he could be found guilty of market manipulation. That’s no joke…
The action we’re witnessing in Tesla stock offers up a couple of quick trading lessons. First, we should always avoid the urge to bet against heavily-shorted stocks that are most susceptible to squeezes. Next, we don’t have any obligation to trade a high-profile play (long or short) if there’s too much headline risk.
Bottom line: Tesla is a soap opera stock — and a major distraction to our regularly scheduled market activities.
For instance, while all the Tesla excitement was unfolding yesterday, the S&P came within striking distance of new all-time highs. The Dow Jones Industrial Average is also breaking out this week above a choppy range that has trapped the blue chips since the winter. Ditto the transports, which are riding a six-week winning streak toward all-time highs.
“If the S&P 500 shakes off the early sluggishness to manage a fifth gain on Wednesday, it will mark its longest win streak since the six-session string of gains ended Feb. 16,” MarketWatch reports. “The broad-market gauge also stands less than 0.5% from its all-time high hit on Jan. 26. If the Nasdaq scores a seventh win, it will match its lengthiest win streak since the period ended March 12.”
I don’t know how the Tesla fiasco will play out. But I do know bulls are in control of the stock market right now. That should open the door for more than a few solid trades in the days ahead.