Wednesday CNBC and its reporter Thomas Franck published an article entitled, "Telsa is the biggest short in the US stock market". My response is “so what”. The story and the reporter missed the point about Tesla (TSLA). The story is simply blah, blah, blah when if you analyzed the current data more in depth the story could have been a contender.
The article pointed out that there is now $10.7 billion of short positions on Tesla (according to S3) and that the percentage of the float short exceeds 25% which is really not a story. Why? More on that in a second.
But first, the latest short interest was released Tuesday after the close and earlier on Tuesday Goldman Sachs reiterated to its clients that they should short the stock and the target was reduced from $205 to $195. If the Goldman Sachs recommendation had any power, then why did the stock price rise and not fall from a Monday close of $289.63 to Tuesday’s close of $304.70?
So Goldman is calling for the stock to drop $108.93 from today's close or 36.19%. If that happens and that is a big IF, then Goldman Sachs would look pretty smart. That would be a double or triple for a short seller in the current environment and most short sellers are happy with hitting singles in 2018.
Goldman's short ideas have been anything but stellar. 2018 ideas have included Shutterfly (SFLY) up 60.08% since they recommended as a short. Also, they have recommended Evertec (EVTC) up 19.08% along with Bloomin Brands (BLMN) up 9.22% since they initiated as a short. Remember short ideas are supposed to go lower not higher.
The latest short interest data on Tesla reflects short interest from March 13 through the 27th. The next short interest data will reflect short selling from March 27th through today's close. So the data released on April 24th after the close will enable us to see exactly how many shares that client of Goldman Sachs shorted in the first two days after the report was issued.
My bet would be that not that many more shares were shorted BECAUSE the shorts just got lit up like a Christmas tree as the stock ran from a low of $244.59 on April 2nd to its close today at $300.93, a 23.03% move. They are not going back to the well right now because they are bloodied and that is why the stock has risen since the recommendation on Tuesday morning.
The price action from April 2nd was not a short squeeze rather it was a put squeeze. This type of squeeze occurs when a stock falls and then sees the put activity become too excessive. We track this via the Erlanger Options Rank (options rank). When the options rank moves aboves 70 a put squeeze can commence. Typically a good put squeeze can last from one to three weeks. Notice the several squeezes circled in the chart below. A strong short squeeze can last from one to three months or even longer.
Now back to the short interest. A huge mistake short sellers and hedge funds in general make is to focus on the shares short as a percentage of float and the total dollars short. It does not solve the question of telling us how long it will take the shorts to cover their position. Only the short ratio gives us that answer. What is more important is to track the range of the Erlanger Short Ratio (short ratio) and then what we call its Erlanger Short Intensity (short intensity).
Currently, Tesla has a short ratio of 4.82 and its short intensity over the last 5 years is 28%. The absolute shares short are now 31,727,162. In the last two years, the highest absolute number of shares short was 35,687,317 back in early December of 2016. Then the short ratio was 7.82 and the short intensity was 88%.
Yes, the dollar value of shares short is higher than it was in 2016 but only because the stock has risen in price since December of 2016 when the price was $192.18. What is most interesting is that the absolute level of short selling has remained pretty much above 25 million shares since 2012. So the short bet has been a constant for the stock over the last six years. Really a very old story.
The reason we track the short intensity of each stock is because we can then track how the shorts do. Simply we track either moderate or heavy short selling. Moderate is when the short intensity is above 50% and heavy is when the short selling is above 80%. Currently, the short intensity is not above 50% or 80% so we are not tracking how the shorts are doing yet.
However, we know that historically when the short selling becomes heavy one is greatly rewarded being long instead of short Tesla. Since Tesla has going public, there have been two times that the short selling was heavy. During those times, the short lost each time. The average loss was 22.8% and happened over 246 trading days. When short selling is only moderate, the shorts lose money 85.71% of the time or six of the seven times they shorted the stock. The duration of those attempted shorts was 134 days.
From this data we can observe that Tesla short sellers are very stubborn and prone to staying with a losing trade. In other words, they are not disciplined short sellers.
It is interesting to note the one time shorts made money they made a whopping 0.36%. So if I were a betting man, and I am, then I would be betting that another short squeeze is about to unfold if the shorts did press their bets here. Once again the shorts will be crushed.
Now that would be a story worth writing about instead of about the premature death of Tesla when history indicates no such thing is about to happen.
Geoff Garbacz is the co-founder and one of two principals in Quantitative Partners, Inc. (QPI). Geoff and his team at Quantitative Partners have over 36 years of experience on Wall Street. Prior to the formation of QPI in 1995, Geoff worked for The Robinson Humphrey Company from 1990 to 1995.
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