Tesla's Short Sellers Refuse to Pull Over

NEW YORK ( TheStreet) -- Tesla ( TSLA) is many things to many people. For short sellers, it represents a position they don't want to abandon, as shown in the last reporting period when short interest edged higher.

While short interest declined from a March 15 peak of over 40% to "only" 32% of the float on June 14, it rose from two weeks earlier. Short interest deflating in the aftermath of a tripling in share price is unsurprising. Also, what shouldn't surprise investors is that short sellers have slowed down only briefly.

With only 19.9 million shares short, it's the second lowest reported number during the last 12 months. When taken at face value and out of context, it's easy to conclude that the bulls have trampled the bears. When viewed inside the context of a stock driving from less than $40 to $100, a short interest level over 30% is a caution flag waving widely.

Between the previous two-week reporting period and the last report on June 14, shares in Tesla remained stable, changing a total of about $2, although with considerable volatility in between. It was during the same period that short interest climbed for the first time since the middle of March.

Why do investors care about short seller activity? Because investors should expect short interest to collapse under the weight of margin calls and stop losses. Instead, short sellers are refueling for another lap around the track.

Profit expectations are why you expose your portfolio to unlimited risk to obtain a limited payoff; shorts continue to believe the odds favor a significant decline in share price.

Shorts underestimated Tesla's billionaire CEO Elon Musk and have paid dearly. They think the market will allow Musk only so much time before moving on.

If Musk, however, captivates the hearts and minds of investors like Amazon ( AMZN) CEO Jeff Bezos has, Tesla may get all the time in the world. We're talking about cars, and Tesla is producing a top-rated muscle car sporting a retail price of less than $100,000.

Shorts want the market to "figure it out quickly" on par with children's tolerance for long trips strapped in a device suitable for space exploration. If Musk sells the long-term dream, the trip may feel like sitting in the back of a 1971 Oldsmobile station wagon traveling along at 55 MPH before the days of DVD players wondering "are we there yet"?

Absent Musk's ability to cultivate a solid decade-long investor mentality, which is rare on Wall Street, shorts will receive a "yes," and likely before 2014. For new investors, the only reason to buy is if you think the potential price appreciation outweighs the risk. With the stock now at around $118, that seems unlikely unless you're an active day trader.

Bottom line: Tesla is trading at a nose-bleed valuation while its chart appears to be extended and close to exhaustion. Investors should fasten their seat-belts and use caution or risk leaving their portfolios in the dust.

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.
Robert Weinstein currently blogs, mentors traders, and writes several weekly columns in Rocco Pendola's Option Investing newsletter from his home in northern Wisconsin. Robert tends to focus on the psychological importance of goals, risk mitigation, emotion, and relatively short term market exposure. With nearly 30 years of studying and investing experience, Robert has experienced the many ups and downs in the financial markets and uses the knowledge gained to maintain balance. Robert believes the best way to make money investing is to avoid losing it. The best way to avoid losing is to know what emotional traps lay in the path of investors and learning how to avoid them. Robert is a voracious reader of financial related books often completing more than one book a week while not trading or writing. Robert contributes to his blog at paid2trade.com on a regular basis with an emphasis on studying behavior finance.


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