Is Tesla’s Recent Stock Plunge Primarily the Fault of Short Seters?
Introduction
Tesla's stock has experienced a remarkable rise over the past few months, driven by a combination of market enthusiasm, innovation, and strong financial performance. However, recent events have led to a dip in stock value, particularly as the global coronavirus pandemic has shuttered large parts of the world's trade and manufacturing sectors. Despite these challenges, many investors and analysts remain skeptical about blaming the recent stock plunge on short sellers. This article aims to critically examine this argument and provide insights into the factors driving Tesla's stock performance.
Understanding the Short Squeeze
A short squeeze is a market phenomenon characterized by a rapid and significant increase in the price of a stock, usually lasting only a few hours. During such events, short sellers are forced to cover their positions, buying back borrowed stocks to minimize losses. While the spike on February 2, 2020, might be interpreted as a short squeeze, the overall year-to-date (YTD) performance of Tesla's stock seems to reflect a broader pattern of investor sentiment.
The stock experienced a 43% increase in under 20 calendar days, followed by a 43% decline in less than 10 days. These rapid fluctuations are indicative of heightened market volatility and sentiment. This behavior is more consistent with what behavioral finance experts term irrational exuberance, a term coined by Nobel laureate Robert Shiller. In hindsight, one can easily identify the optimal time to take positions, but for many investors, especially those focused on long-term gains, such short-term volatility is a significant risk.
Quantitative Analysis and Retail Investing
I am a retail investor who avoids chasing short-term gains and risks. Instead, I apply quantitative analysis using StatArb as a stock-selection algorithm and economic forecasting as a portfolio-weighting algorithm. Tesla has not yet appeared on my dashboard, even when I consider the top 10 long and short positions out of a universe of approximately 7,000 non-OVER-the-counter (OTC) Wall Street stocks. This suggests that Tesla's recent volatility does not align with my investment strategy or criteria.
Impact of Short Selling
Short selling plays a role in moderating stock price swings and tempering irrational exuberance. When the market is overvalued, short sellers create a counterbalance by betting that the stock price will fall. Conversely, during a downturn, short sellers can raise the price by closing their positions as they buy back the stocks they borrowed. However, the recent short activity in Tesla does not seem to be a primary cause of the stock plunge.
The number of shares shorted has actually decreased over the past year. For instance, about 30% of outstanding shares were shorted a year ago, dropping to approximately 20% last February, and is currently at around 22%. These figures do not support the notion that the plunge is primarily due to short sellers. Moreover, Elon Musk and his fans continue to complain about short sellers, a common sentiment in volatile markets.
Analysis and Conclusion
In conclusion, the recent stock plunge in Tesla is more likely to be attributed to broader market conditions and economic uncertainties, rather than short sellers. The examples cited above support the notion that Tesla's stock performance reflects investor sentiment and broader macroeconomic factors, such as the impact of the coronavirus pandemic on global trade and manufacturing.
The focus on short sellers in this context appears to be a convenient narrative to explain market volatility. However, a more nuanced understanding of market dynamics, including quantitative analysis and a broader context of economic events, offers a more accurate picture.