Has Tesla (TSLA Stock) become overvalued?

The electric car manufacturer is one of the most traded names currently as I’ve spoken about how the stock has been added to the S&P 500 after being eligible for a long time. Tesla has also been known for another thing, but not as good bearing as its addition to the index. Ever since Elon Musk had come up with the idea of creating electric cars and his venture into that business, there have been investors that are pessimistic about the future of this company.

According to S3 Partners analyst Ihor Dusaniwsky, Tesla remains the most heavily shorted stock in the world with more than $22 billion in short interest. That amount dwarfs the second largest shorted stock by at least $10 billion, Alibaba Group Holdings. Currently Alibaba has only $12 billion in short interest. So when the price of Tesla skyrocketed from $407 all the way towards $574, it burnt a lot of short sellers along the way which only added fuel to the already raging fire.

Tesla’s short sellers have accumulated more than $30 billion in market-to-market losses in 2020 and seem on the track for more losses as long as Tesla continues to keep going higher and higher racking in those profits. This stock has gained more than 487% on a year-to-date basis, and those sellers have not been all that happy about it. What’s also important to take note is that with this meteoric rise, the exciting short-sellers are not being replaced by newer ones, so the open interest for short positions might be diminishing by the end of December.

All of this is contributing to the continuous up shot in the price of Tesla. The decreasing short interest as well as the increased long interest will continue to play a huge role in the current bullish scenario of Tesla. With ETFs and passive portfolio managers having to readjust their positions and start to calculate how to add Tesla to their portfolio to stay within close proximity to the Index, buying interest has indeed risen. This gave Tesla the initial push higher as investors scrambled to buy up the stock as it’s a major move to the company acknowledging it’s worth.

With this push higher, short sellers got burnt and exited the market, adding more fuel to the already raging inferno, which leads me to the belief that the stock might have become a bit (well more than a bit) over-extended. Looking at the P/E ratio, Tesla is trading at more than 1000 times, to be exact 1115.22 times. As a trader, this gives me pause and a bit of foreboding as I don’t believe Tesla is actually worth all that much.

Don’t get me wrong, I believe that the fundamentals of the company are really strong and with their 5th consecutive positive earnings, I can see that the company is doing extremely well. But, is it worth the amount it currently trades at? No, I don’t think so.

Future Track of Tesla

Now that I’ve said my part, allow me to explain my point in the track that Tesla will be taking. If we were to take a look at the daily chart of Tesla, we’d see just how the stock catapulted into all time highs because of the news of its addition to the S&P 500 index. However, what we can also notice is that the RSI (Relative Strength Index) has reached the 78.86 level indicating that the stock has entered into overbought territory and to make matters worse, the price action has exceeded the Upper band of the Bollinger Bands.

Both of these signs are extremely bullish, but they have become rather unstable. The way I see it, Tesla is bound to have an intense correction lower reaching towards the $480 level if not lower. A correction to that level would provide the Bulls with enough pullback momentum to blast through the all time high and record a new one. This scenario would be null and void should the price fall beneath the $400 level as that level is currently acting at the ultimate support and a pretty juicy target for those short sellers.

One more thing that I would like to highlight. With the current massive influx of buyers for the stock, when it’s still not yet part of the S&P 500, we might be facing Buy-the Rumor, Sell-the-Fact type of scenario, as when the time comes for Tesla to be included into the S&P 500, the price will drop. How severe is the drop? Well that all depends on how much supply will be available when the time comes for buying.

Investors might be hoarding the stock for when ETFs and Portfolio managers come knocking to buy the stock, they might be faced with a shortage and end up having to buy it higher than it currently is. Either way, December 19th will be an interesting day for Tesla.