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Tesla's Hazard Lights Are Flashing

Intuitively, an investor may believe that as the stock moves increasingly higher, shorts are forced to capitulate and further buying is from "real" investment into the company. The reality is that short-sellers come and go and as the stock increasingly becomes overbought, new short-sellers jump on. If the price rise continues, those new short-sellers eventually capitulate and the spike continues higher.

The process repeats until short interest falls enough that the squeeze burns itself out like a bottle rocket, or the remaining short-sellers have the stamina (and thick enough stomach lining) to withstand the drawdown.

According to Nasdaq, the number of days required for all shorts to cover based on volume is at the lowest level in the last year. This is backed up with the smallest amount of short interest in the last year, too.

There is still heavy short interest in Tesla, but with the increased trading volume it's easy for shorts to enter and exit. Tesla's continued oversized short interest strongly suggests short-sellers believe the reward for maintaining their position is worth the short-term volatility and the risk of being wrong.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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