Tesla stock (ticker: TSLA) has shown impressive gains in Wednesday trading, despite the absence of any significant news. The only recent development was a disappointing delivery number released on Monday. As a result, investors are left wondering: What is driving this increase?
Currently, Tesla stock is up 3.7% at $255.57 during midday trading. In comparison, the S&P 500 and Nasdaq Composite have risen by 0.3% and 0.7%, respectively.
Although shares have declined by approximately 2% since the electric-vehicle manufacturer reported third-quarter deliveries of around 430,000 units, missing the consensus estimate by 25,000 vehicles, investors were somewhat prepared for this outcome. Prior to the delivery number announcement, Tesla stock had already dropped by 14% following the company’s second-quarter results. During the second-quarter-earnings conference call, management had informed investors that third-quarter production would be reduced due to planned maintenance.
It seems that most of the negative impact resulting from the weak delivery number had already been factored into the stock’s price. However, some critics might not have recognized this and inadvertently contributed to the post-delivery rally. According to Bloomberg, short interest in Tesla stock had increased by about 7 million shares prior to the delivery number report.
Short Sellers and Stock Price Declines
Short sellers play a crucial role in the stock market by betting on price declines. They do this by borrowing shares and selling them, with the expectation that they can buy the shares back at a cheaper price later and return them to the lender. This strategy is known as a bearish position. The level of short interest is determined by comparing the total number of borrowed and sold shares to the total number of shares available for trading. In the case of Tesla, approximately 3% of the shares available for trading have been sold short.
Short Covering and Rising Stock Prices
Recently, there has been anticipation among bearish investors to take advantage of a weak performance in Tesla’s stock. However, it seems that short covering, which involves buying stock to replace the borrowed and sold shares, might be one reason why the stock is actually rising. This phenomenon can create a self-perpetuating cycle, as the increasing prices resulting from short covering incentivize more short sellers to buy stock.
According to Ihor Dusaniwsky, the managing director of short-selling research firm S3 Partners, stocks with a significant increase in short selling and substantial mark-to-market profits over the past 30 days may experience short covering during a year-end market rebound. This occurs as short sellers attempt to realize their profits. In September alone, short sellers made around $700 million, as per Dusaniwsky’s tracking.
The Role of Moving Averages
Another factor contributing to Tesla’s stock rise could be the fact that it is currently trading above its 50-day moving average, which had remained below for most of the past two weeks. Traders often monitor moving averages as a means to gauge investor sentiment.
Tesla’s Volatility
It is important to note that neither of the aforementioned reasons alone are sufficient to explain the stock’s recent performance. Tesla stock is known for its volatility, being more than three times as volatile as the S&P 500 in recent months. Consequently, the stock exhibits significant fluctuations on any given day, whether it moves up or down.
Brace for More Volatility Ahead of Tesla’s Q3 Earnings Report
Investors in Tesla should prepare themselves for a period of increased volatility leading up to the company’s third-quarter earnings report, which is scheduled to be released on October 18th.
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