Tesla: The insane rally – just because of Short-Squeeze?

About the probable reason for absurd valuation levels in Tesla stocks which might be even typical for the stock markets as a whole

The rally at Tesla seems to know no bounds. Yesterday the stock was trading above the $1400 mark. Meanwhile, Tesla is not only the most valuable car manufacturer in the world. And that with sales of less than 400,000 vehicles (whereas Volkswagen and Toyota each sell more than 10 million vehicles). Tesla is now even more valuable than the car manufacturers General Motors, FiatChrysler, Honda, BMW, Nissan Hyundai, Mercedes and Ford combined:

Tesla - mehr wert als viele andere Autobauer zusammen

Is this even understandable? After all, Tesla stocks only reached an all-time high of 400 Dollars in December 2019. What has changed so fundamentally since December? The Corona crisis is also hitting Tesla hard. Even though the company reported sales of 90,000 vehicles for the second quarter. But Elon Musk is notorious for creative accounting methods.

One of Musk’s key objectives is likely to be to have the stock included in the S&P 500. However, to do so, the company must report GAAP profits for four quarters in a row. It is very likely that Musk will then be able to use his accounting tricks to end the second quarter with a profit (Musk had called on Tesla employees to make an extraordinary effort shortly before the end of the quarter).

Perhaps investors are anticipating a creatively manipulated profit by accounting techniques and thus the inclusion in the leading index S&P 500. Estimates suggest that institutional investors will then buy 25 million shares of Tesla (mainly via ETFs that replicate the S&P 500 etc.).

Tesla at an all-time high – Shortsqueeze with short sellers?

Or is it all a gigantic short squeeze, as Jens Raabe thinks? To determine whether the rise in Tesla’s share price is really a short squeeze or not, we have to look at short interest – i.e. the volume of short sold Tesla shares. Until the end of June the Tesla share was trading below the 1000 Dollar mark. Shortly before Tesla’s announcement on July 2nd about the sale of 90,000 vehicles in the 2nd quarter, the share price increased significantly. Now let us take a look at how short interest really stands:

Das Short Interest bei Tesla
(Graphics: https://fintel.io/ss/us/tsla)

So it is clearly visible that starting with the rise in the stock price, the number of short sold stocks has increased significantly. From 1.876 million on June 23rd to almost six million on July 7th, 2020. So this clearly shows that short sellers have significantly increased their short positions with the rise of the Tesla stock. This is the complete opposite of a short squeeze, where short sellers cover their short sold stocks due to the “pain” of the short position, i.e. act as buyers.

It is therefore not a short squeeze on the Tesla stock, but pure euphoria. This euphoria in turn meets a market mechanism that works especially with Tesla, because there are relatively few Tesla stocks. In contrast, a multiple volume is moved on the options market. Dirk Schuhmanns summed up this mechanism in an article entitled “Tesla: Another possible price manipulation with options?

“But when the stock price rises and approaches the exercise price of the purchased options, the market makers as sellers of the options have to buy more and more stocks to compensate for their increasing risk.”

Conclusion: The possible inclusion in the S&P 500 is the likely price driver

Elon Musk has a massive interest (as a major shareholder) that Tesla will be included in the S&P 500. To do so, he needs a profit in the 2nd quarter of 2020. So, the figures are being spruced up as much as possible. This creates a dynamic about options and euphoria, which explains this rise in the stock price. However, short sellers, who have to cover positions, are not the cause: they are only now betting increasingly on the bubble to burst, called Tesla. In this respect, Elon Musk’s PR coup of selling “short shorts” in order to mock the shortsellers also misses the mark.

Elon Musk hat gute Laune - und will, dass die Aktie von Tesla in den S&P 500 aufsteigt

Elon Musk. Photo: JD Lasica CC BY 2.0

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