The bull-bear debate is heated, taking up a lot of time on financial and social media. The bulls have been dominating lately, but there may be far fewer real bulls out there than investors assume. Just watch how stocks trade.
Tesla (ticker: TSLA) stock fell 9.7% after better-than-expected second-quarter results. Incredibly, this was the same percentage decline as the drop after the first quarter figures when profit margins tumbled following sharp declines in vehicle prices earlier in the year.
A one-day move is no reason why there might be few real bulls. Trading volume is the problem. Tesla stock traded at around 173 million shares on Thursday. Yesterday, the volume-weighted average price, or VWAP, of Tesla stock was $269.72. So about $47 billion worth of shares changed hands the day after the earnings report.
That’s more than 5% of the market capitalization of the entire company. That’s more than 6% of the market capitalization excluding shares held by CEO Elon Musk. (It trades less frequently.) The comparable number for
stock (AAPL) on Thursday is around 0.4%.
The earnings report is not responsible for the difference. Tesla shares typically trade around 10 times the dollar value of Apple on any given day. (The dollar value is just the number of shares traded multiplied by an average price.) This means Tesla’s total market capitalization rotates every 20 to 30 days. Excluding weekends, it’s once a month. Apple shares rotate about once a year.
Another way of saying that the average holding period for Tesla stock is about 25 trading days, or five weeks, including weekends.
Theoretically, no one owns Tesla stock for more than a month. Of course, there are long-term holders, but taking them into account means that the average holding period excluding Musk and long-term holders is even shorter.
Tesla’s trading volume and value is unusual. A strategist asked about the phenomenon did not get an answer on what it all means. It is just what it is.
It seems that Tesla “is loved by traders and Apple is loved by investors,” says Fairlead Strategies founder and market tech Katie Stockton. Stock market technical analysts look at charts to predict what’s next and usually deal with many traders.
Tesla’s “beta” vs.
is around 1.6 compared to Apple’s 1.1. Beta is a measure of volatility, relative to a market or index. If the market is up 1%, a stock with a beta of 1 will also be up 1%. “Higher volatility [tends] to attract short-term investors,” Stockton adds.
The decline after earnings showed signs of “upside exhaustion,” she says. In the three months leading up to earnings, Tesla stock was up more than 60%. Stockton sees $243 as support for the stock. That would still leave stocks up nearly 100% for the year.
One thing excessive trading does is eat away at investors’ potential long-term gains. Even Barrons falls victim to Tesla’s trade volume problem. We wrote positively about Tesla stock in January, and we typically have a one-year time horizon for our stock picks and pots. Tesla’s stock doubled in the weeks after the article, much faster than expected, and we recommended selling some. Since that call, Tesla stock has gone up again.
Trading around a portfolio position is a way to manage volatility, even for long-term holders. Another strategy for long-term holders is to do nothing and endure the ups and downs. For many years, this is the best strategy.
Tesla stock ended down 1.1% on Friday at $260.02, down nearly 8% for the week. The S&P 500 ended flat and
Write to Al Root at email@example.com