After eight straight gains,
stock is down. There is no smoking gun to blame Friday’s drop on. Shares just hit $200 too soon, driven by everything from stock chart patterns to options traders to ballooning investor expectations heading into a big event.
stock has dropped 5.8% Friday, while the
is little changed and the
is off 0.8%.
It’s a big drop, but gains have been something to behold. Coming into Friday trading,
(ticker: TSLA) stock had risen for eight consecutive days and 14 of the past 15. Shares were up 24% over the eight-day span and 63% over the 15-day span.
At one point on Thursday, Tesla stock was up 110% from the 52-week low of $101.81 set on Jan. 6, just after Tesla announced price cuts in China which were followed by price cuts in the U.S. about a week later.
The gains are welcomed by bulls, but Wall Street can get nervous about too much of a good thing. Thursday evening, Morgan Stanley analyst Adam Jonas suggested the doubling of Tesla stock in roughly 24 trading days was “too much, too soon.”
He pointed to high trading volume as evidence that things were getting stretched. Tesla stock has traded roughly $800 billion worth of shares to start 2023. That’s up about 50% compared with trading over the same number of days to close out 2022.
Stock trading isn’t the only area where volumes have been rising. Option trading in Tesla stock is up to and getting more bullish. The five-day average volume for Tesla call options is at about 2 million contracts, according to Bloomberg data. The 20-day average is 1.8 million contracts, indicating more options have been trading recently.
Calls are a bullish bet that a stock will rise. They give the holder the right to buy a share at a fixed price in the future. The value of a call option rises as the stock prices rise. Put options do the opposite. They give the holder the right to sell a share at a fixed price.
More call options on Tesla stock have been trading than put options, another sign that investor sentiment was improving. The put-call ratio was roughly 1.3 a few weeks back. Now it’s closer to 1.5 times, according to Bloomberg data.
All the data points are a warning that the Tesla rally can run out of steam. Mark technicians have also pointed out that Tesla stock was due for a pause, running into resistance at about $200 a share.
Technical analysts aren’t concerned with fundamentals, they look at chart patterns to get a feel about investor sentiment and when it could change.
Jonas had an idea for what could change sentiment, wondering in his report if the January inflation number, due out on Valentine’s Day, will knock the stock down.
Faster-than-expected inflation hits richly valued, high-growth stocks harder than others. Higher inflation means investors will expect higher interest rates and higher rates make financing growth difficult and also tend to push down stock market valuations, hurting the higher-valued stocks more.
Tesla is now trading at about 51 times estimated 2023 earnings. The S&P 500 trades for about 18 times earnings.
In the long run, CPI numbers and options contracts are afterthoughts. Earnings, growth and market share will determine where Tesla stock goes.
Jonas is looking for details about the future at the company’s Mar. 1 investor event in Texas. “We’re excited to see progress on the manufacturing side including giga-press…4680 battery pack, structural pack, and other innovations,” he writes.
Jonas sounds cautious, but he rates shares Buy. His price target is $220 a share.
Write to Al Root at [email protected]