I have been privy to an eye-catching statistic: Tesla (TSLA) has been the stock with the greatest number of net buys at our firm every day this month. Some of these customers must have been attempting to buy dips in the stock, but for far too many this has morphed into a painful exercise in trying to catch a falling knife.
What we’ve seen in this month’s TSLA statistics is too-many investors lack of awareness of the unfortunate convergence of several factors that have driven investor behavior for the past couple of years. First is an unwavering allegiance to the strategy of “buy-the-dip.” It was almost foolproof from mid-2020 through 2021 as the Fed relentlessly added liquidity, so it became almost reflexive to many investors. Second was a reversal in the concept of “Growth at Any Price.” We saw any number of Covid-era high-flyers plummet this year as those stocks succumbed to over-enthusiastic projections. Finally, Elon Musk’s cloak of infallibility showed plenty of wear, if not disintegrated entirely. These are items we warned about in January, May and April, respectively, but old habits die hard.
For most of this year, TSLA has been among the most actively traded – and frequently the most active — stock and options class on the IBKR platform. That is quite a feat, because until very recently it had a higher dollar value than the vast majority of stocks, even after splitting 3:1 in August. At some level, that is unsurprising. I have great difficulty in recalling a company or CEO that has captured the public’s imagination in the manner that TSLA and Elon Musk have. Meme stocks could only dream of the fervor with which TSLA’s devotees bring to the company and its products. And the fervor is well-deserved. I have frequently referred to TSLA as a “faith-based” stock, but that was not mentioned pejoratively. The faithful had been richly rewarded for over a decade even as they took the stock to levels that defied conventional valuation metrics.
Each day I see a report with the 25 most active names at Interactive Brokers (IBKR) on a rolling five-day moving average. (I am not privy to anything more detailed or anything account-specific.) As mentioned above, TSLA has been at the top of that report and showing net buys every day this month. Also, as the month went on and the stock fell, that net buying rose from about 10,000 early in the month to over 41,000 yesterday. While some of that buying may have been hedging options positions or covering shorts, we also saw net buying of calls and selling of puts over that same period. For those of you who might be wondering where the idle cash might be coming from or whether margin is being employed, it’s a question I have asked as well. I simply don’t have access to that information.
Regardless of the specifics, it is nearly impossible for me to imagine a scenario where this relentless buying has been anything but painful for the majority of these customers. It was well-documented that TSLA was down 44% on a month-to-date basis. If we manage to hold this morning’s modest bounce, that would make only the fourth time that TSLA closed higher in December’s 19 trading days so far. (Remarkably, we were unchanged on December 1st.)
Most ominously, Bloomberg data showed the volume weighted average price (vwap) of TSLA for December was $156.89 through yesterday. That is over 30% above yesterday’s close. The stock would need to rally 78% to get back to where it started the month or 44% to get back to its vwap.[i] With the stock closing at its lows for the month, there is no way that any unhedged buyers in December were profitable. The unfortunate question is how unprofitable were those purchases?
It is understandable to try to buy dips. That is human nature and a trading strategy that pre-dates the advent of exchanges. But when the strategy is obviously, painfully wrong, it requires some difficult self-reflection. Have you been judicious in cutting losses? Have you simply been buying more because the price is even lower than it was a short while ago? The increased net buying indicates that at least some customers are thinking that way. And if you are continuing to buy, what are you trying to achieve? If you’re trying to make yourself whole, recognize exactly how much of a rally is required to do that. Are we talking about a 40% or 70% rally? What is the likelihood of that in the near future? Traders may need to reassess their profit objectives.
This was a highly unenjoyable piece to write. My main goal is to keep our customers safe, even more so than making more money for them. In my friend Steve Sears’ book, The Indomitable Investor, he noted after many interviews with highly successful market veterans that “Bad investors think of ways to make money. Good investors think of ways to not lose money.” Too many have been hanging on to now-passe themes and unbridled faith at great personal expense.
Note: The author has a short position in Tesla stock and long positions in Tesla put options
[i] Some of you may be incredulous: how can the stock be down 43% on the month but require a 78% rally to get back to even? Or how can the stock be 43% below it’s vwap? It’s about perspective; whether you held the stock at the start of the period or initiating a trade today (off yesterday’s close)
TSLA ended November at $194.70. It closed yesterday at $109.10
Month-to-date loss: (194.70-109.10)/194.70 = 43.96% ~ 44%
Required rally to flat for the month: (194.70-109.10)/109.10 = 78.46% ~ 78%
Amount below vwap: (156.89-109.1)/156.89 = 30.46%
Required rally to vwap (156.89-109.1)/109.1 = 43.78% ~ 44%
Disclosure: Interactive Brokers
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