Tuesday, September 16, 2014

Tesla Rally Hits Speed Bump, Fuels Momentum Sell-Off

by Bill Maurer

Recently, the rally in shares of electric car maker Tesla Motors (NASDAQ:TSLA) has come to a screeching halt. On Monday, shares took a tumble after a cautious analyst note, and are now nearly 13% off their 52-week high. This has pushed the stock down towards its 50-day moving average, and the fall helped to lead a momentum based selloff ahead of the Alibaba (Pending:BABA) IPO. Today, I'll discuss why Tesla shares fell, and why investors could see another leg of downside before support is reached.

A cautious analyst note:

Monday's fall coincided with a cautious analyst note from Morgan Stanley, which seems to agree with Tesla CEO Elon Musk that the stock has gotten ahead of itself. The firm does have an Overweight rating on the stock, as well as a $320 price target. That target represents a bit of upside from current levels, especially after Monday's fall. The firm noted four reasons for being cautious in the short-term. They are:

  1. EVs are failing categorically on a global scale.
  2. China demand growth may be severely limited by Tesla's ability to develop the supporting dealer and service infrastructure.
  3. Democratization of EVs is going too far, as it requires breakthroughs that may be too unreasonable to take for granted as a base case.
  4. In an autonomous world, why would people buy a Tesla?

To see a more thorough explanation of these items, click here. In point two, the analyst discusses how Tesla is not interested in short-term profitability at the risk of disappointing new customers, especially in China. I recently discussed how profitability was the one major item I was concerned with when it came to Tesla. While revenue estimates have soared, non-GAAP EPS estimates for this year have dropped. With Tesla shares trading at more than 250 times this year's expected non-GAAP earnings recently, analyst notes like this can really burst the bubble. High valuations for momentum names can lead to huge drops, and I'll explain later how this spread to other names on Monday as well.

Crossing the 50-day:

Tesla's fall on Monday was rather steep, and it eliminated a couple weeks worth of gains. As you can see in the chart below, it also sent shares down towards their 50-day moving average, which has not been seen for a couple of months. I also included the 200-day moving average line to make a crucial point.

(click to enlarge)

(Source: Yahoo! Finance)

As you saw in the chart, breaking below the 50-day has not been good for Tesla shares. Usually, the fall has continued until shares traded down to the 200-day moving average, which is a bit below where we are now. Obviously, I can't say this process will repeat, but there was some significant technical damage done here.

Leading the momentum names lower:

Despite the Dow Jones Industrial Average (NYSEARCA:DIA) being up more than 43 points on Monday, the NASDAQ Index fell by nearly 49 points, more than one percent. Tesla's 9% plus fall helped to lead a number of growth/momentum names lower. Here's a list of some of the worst performers in the group:

  • SolarCity (NASDAQ:SCTY) fell by 8.99% and shares are off 11.25% from last Friday's high.
  • GT Advanced Technologies (NASDAQ:GTAT) fell by 7.33%. This extends a recent slide that has shares down by more than 37% since their late August high.
  • LinkedIn (NYSE:LNKD) shares fell by 7.61% on Monday and are down more than 10.5% from last week's high.
  • Twitter (NYSE:TWTR) shares fell by 5.24% and are down nearly 8% from last week's high.
  • Netflix (NASDAQ:NFLX) shares fell by 3.95% and are down by nearly 6.5% from last week's high.
  • Baidu (NASDAQ:BIDU) shares fell by 3.32% and are down by nearly 9% from their early September high.

I could go on, but you probably get the point by now. Most of these names don't have a company to company connection with Tesla, except for SolarCity. However, a lot of these names tend to trade in stride with each other. They all lost more than 3% on Monday, and are down more than 6% from recent highs. These aren't just declines that correlate to the market, as the NASDAQ is down about 2% from its 52-week high. All of these growth/momentum names are much more volatile than the market, and unfortunately for investors, the recent action is to the downside.

The upcoming Alibaba IPO:

There seems to be a general concern that there will be some market selling into the IPO, as investors raise cash to buy Alibaba shares. With Alibaba being seen as a growth company, it seems as if investors may want to sell other growth companies, or momentum names, to raise funds. I believe that this is part of what we saw on Monday, combined with the fact that many of these names have rallied strongly in recent months. A pullback may have been inevitable in the minds of some.

Final thoughts:

Tesla shares tumbled on Monday after a cautious analyst note, and the selloff spread to other momentum names. The analyst believes that Tesla stock had gotten ahead of itself, especially in the short-term. Technically speaking, the stock may trade down towards the 200-day moving average, which would seem to be the next level of support. If that occurs, investors might want to accumulate on the pullback. For now, investors are eagerly waiting the Alibaba IPO, and that might cause some additional pressures on the momentum group. On Monday, Tesla led that group lower.

Source: Tesla Rally Hits Speed Bump, Fuels Momentum Sell-Off

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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