The self-fulfilling prophecy TSLA cannot escape

By Jani Ziedins | End of Day Analysis

Jan 30

Free After-Hours Analysis:

Traders are GooGoo-GaaGaa for TSLA’s latest earnings report, sending the stock surging 10% today. The company blew away expectations by actually making money last quarter! Adding those profits to the previous three quarters and the company only lost $862,000,000 last year. What a relief!

All sarcasm aside, we need to be realistic about both the company and the stock. Traders love this stock and the share price doubled since the third quarter’s earnings report last October. That’s one hell of a performance and no matter what a person believes about TSLA’s future prospects, there is only one way to trade a move like that. Unfortunately, bears cannot help themselves and countless cynics have been absolutely demolished by this strong move higher.

But now I feel the tide is about to turn. These late buyers are going to be the next ones in trouble. The first thing to remember is institutional money managers control the bulk of all money in the stock market. What they say goes no matter what anyone else believes. The challenge going forward for TSLA is institutional managers are a cautious bunch. They’ve been around long enough to know these explosive surges higher never last. Even if they love the company, they won’t chase a move like this. Instead, they wait for the inevitable pullback from these frenetic levels.

What happens next is a bit of a self-fulfilling prophecy. The majority of big money managers avoid what they think is an unsustainable move. And when enough of them do that, eventually the retail investors run out of money and bears finish covering their shorts. Once that happens, supply dries up and prices tumble.

The above most definitely isn’t a judgment on the company’s financials or growth prospects, but more a look at the supply and demand cycle that is behind every hot stock. Big money fears heights and they won’t embrace this move until prices cool off. Without their deep pockets, this sharp rally will not stick.

Smart money is taking profits at these levels, not chasing prices recklessly higher. Only fools are buying TSLA above $600 and the thing to remember about fools is they don’t have a lot of money. Expect this stock to cool off very soon. Now don’t get me wrong, I’m not calling today a top and I most definitely wouldn’t short something just because it is “too high”. But I do know for certain at some point soon this stock is going to come crashing back to earth and anyone who is patient will be able to buy all the TSLA they want at lower prices. At the very least, we should expect prices to return to the $500s and even a dip into the $400s is highly likely. I would feel much better buying the company at those levels after this frenzy cooled off.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $TSLA


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.