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Weekly Investment Idea – Tesla
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As a result of prolonged higher inflation, bond yields have been rising as investors and traders prepare for multiple central bank rate hike cycles. This is prompting hedge funds to sell growth-oriented technology shares quite aggressively as these tech stocks generally have a significant amount of debt and the potential rising rates are seen as a drag on future growth. The tech-heavy Nasdaq 100 dropped 4% during the first week of trading in 2022, underperforming the S&P 500, which dipped just under 3% during the same period.
Before August 2021, Cathy Woods’s ARKK fund was riding the Tesla Inc. wave as Tesla stock accounted for about 10% of the $21 billion ARK Innovation ETF (ARKK). According to the Goldman Sachs (GS) Hedge Fund Trend Monitor, US equity hedge funds are up 13% year to date, but only 3% for the last six months in 2021. A recent Financial Times article stated that Hedge funds gained 8.7% on average from January to November 2021, according to data provider HFR. That marks their third consecutive year of gains, but trails by some distance the US S&P 500 index’s 24% total return over that period.
It is thought that Cathy Woods and her team are selling Tesla positions to cover the funds to cover client redemptions as the rest of the fund’s bets don’t work out so well and the performance drops. The above chart shows the weight of Tesla within the fund, and it is clearly coming off from its dominant position. So it could be that other funds would do the same with their best performing positions.
Although hedge funds were aggressive in selling tech stocks during December, retail traders were looking for reasons to participate in the Santa Claus rally. It has been more than a decade since Goldman Sachs’ prime brokerage started keeping track of the Hedge Fund data, and the recent tech stock dump marked the largest dollar sale in that time span.
Tesla on the first Friday of January 2022 dropped -3.54% and this comes after a couple of months of disruptions since the stock price hit an all-time high of $1243 in November 2021.
Tesla is the vanguard of Electronic Vehicle manufacturers and clean energy. Their CEO is competing to be the richest and most influential person in the world. It was Elon who graced the cover of Time Magazine in 2021 as Person of the Year, although I wouldn’t blame you for wanting to debate that if you’re heavily invested in crypto. Tesla Motors was founded in 2003 and has been developing high-performance automobiles that are the world’s best and most popular pure electric vehicle for over a decade, with zero tailpipe emissions and the safest, highest-rated vehicles on the road.
Having posted a poll on Twitter if it was a good idea to sell shares, Musk decided to follow through with the decision in November. In a statement at the time, Musk said he would “abide by the results of the poll, whichever way they turn out” and noted that selling shares would be the “only way” for him to pay taxes as he does not take a salary or bonuses. It is common for share options to get cashed in this manner but not necessarily at this magnitude. As a result, he is now expecting to pay $11bln in taxes, which is probably the most ever paid by an individual in one transaction.
Tesla announced it delivered a record number of 308,000 electric cars in the Q4 of 2021, which you would have thought was a massive positive for the company and for this to be reflected in the share price. Around this record-breaking time, CEO Elon Musk announced that his target to sell 10% of his stake was close to being completed. So, there is a couple of questions investors will be asking themselves. 1) is this technical sell-off coming to an end now that Musk has completed the sale, and 2) will the record vehicle sales encourage value investors to step in at this discount? My thoughts are that even if the two questions return a positive, there is no point buying the stock if the index is on a downward slide.
Looking at a chart of a proprietary index which includes AAPL, MSFT, FB, AMZN, GOOG/L and TSLA it is clear to see that the top 6 within the Nasdaq, who have a combined index weighting of 45% has breached a bearish line in the sand on the weekly chart. Not since the COVID-19 fall out in 2020 has this cohort been so collectively week.
Moving down to the daily time frame, it could be that this top 6 companies will seek out their daily 200 EMA and find some dynamic support. Or maybe next week the weekly chart carries on going lower and thus dragging the Nasdaq’s 100 companies with it.
For Tesla all they can do is keep pushing forwards and hope that if fundamentally they are improving the technical analysis eventually align.
The increased sales are expected to keep growing, so the company’s fundamentals could be improving. Tesla expands its Model Y electric vehicle (EV) to markets in the United Kingdom, having been successful elsewhere and especially in China. The news came out last week that several reservation holders for the electric SUV in the UK are set to receive the first deliveries of the vehicle, according to a recent email sent out by Tesla.
In the email, Tesla writes “Prepare for Your Model Y Delivery,” then encourages users to sign in to finish other pre-delivery items. UK Model Y units are currently produced by Tesla’s Gigafactory Shanghai, though that could change upon the company’s opening of the new Gigafactory Berlin-Brandenburg in Germany, which is expected to receive final approval for production sometime in early 2022.
Tesla’s Model 3 became the second best-selling new vehicle overall in the UK last year. The record number of sales beat the previous record set in the third quarter of last year when the carmaker delivered 241,300 vehicles. Tesla delivered more than 936,000 electric vehicles in the whole year 2021, up from 499,647 in 2020.
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Looking at a daily chart of Tesla on the ActivTrader platform, the daily 50-period EMA is currently acting as support at 1025.38. The most significant market structure other than the all-time high and recent swing high is the support level that was tested after the drop from November. $900 would be a logical target for a retest on continued weakness in Tesla’s share price if the tech sell-off continues. Assuming this fall didn’t happen in one fell-swoop the daily 200-period EMA may be at the significant support zone in confluence. There is also a chance the high from the 16th of December acts as a level of support too.
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$994 is just below the 61.8% Fibonacci retracement level so I am expecting a lot of traders to have their fingers hovering over the buy button at that level and for the 200-period EMA to act as a good launch pad for a long.
Obviously, if we see no buyers entering with conviction and in large volume, we could switch to selling the rallies following a break of market structure support. This would be a short-term strategy as fundamentally it is unlikely that the institutional ownership which amounts to 41.18% will be keen to sell their entire core position, when the company is pushing forward with sales etc. The number of reported Held positions to Decreased positions are 371.128,103 to 12,906,897. This core group holding the bulk of shares are more likely to look for value buying opportunities following any correction.
