Tesla’s Bull-Bear Debate: A Closer Look at Trading Volume

The ongoing Tesla bull-bear debate continues to dominate financial and social media platforms. While the bulls seem to have the upper hand lately, the reality might be different from what investors assume. To understand this, we need to examine how the stock trades.

In the aftermath of second-quarter earnings, Tesla (ticker: TSLA) witnessed a significant 9.7% drop in its stock. Interestingly, this percentage decline mirrors the dip experienced after the first quarter, when profit margins suffered due to substantial vehicle price cuts earlier in the year.

However, it’s essential to note that a one-day move alone doesn’t necessarily indicate a lack of true bulls. The crux of the issue lies in the trading volume. On Thursday, around 173 million shares of Tesla stock were traded. Considering the volume-weighted average price (VWAP) of $269.72, approximately $47 billion worth of stock changed hands the day following the release of the earnings report.

This figure translates to over 5% of Tesla’s entire market capitalization. Furthermore, if we exclude the stock owned by CEO Elon Musk (who trades less frequently), the percentage rises to over 6%. In contrast, Apple (AAPL) accounted for only about 0.4% of its market capitalization in trading activity on Thursday.

Interestingly, these differences cannot be solely attributed to the earnings report’s impact. Tesla typically sees trading volumes worth ten times the dollar value of Apple on any given day. In other words, Tesla’s entire market capitalization is exchanged every 20 to 30 days. This turnover occurs approximately once a month, excluding weekends. On the flip side, Apple stock turns over about once a year.

Based on these trading patterns and volume ratios, it becomes clear that there might be fewer true bulls for Tesla than initially assumed. The market’s reaction and trading habits paint a compelling picture that investors should carefully consider when evaluating the electric vehicle manufacturer’s stock.

Distinctive Investment Trend for Tesla Stock

The average holding period for Tesla stock can be characterized as remarkably short, lasting approximately 25 trading days. In other words, investors typically hold Tesla stock for only about five weeks, which includes weekends.

To emphasize this point further, it is worth noting that very few individuals hold Tesla stock for more than a month. Although there are some long-term holders, their presence doesn’t significantly impact the average holding period. As a result, the average duration becomes even shorter when excluding Elon Musk and other long-term holders.

The remarkable trading volume and value of Tesla stock remain an enigmatic phenomenon. Even astute strategists cannot fully explain the implications or underlying reasons behind it. However, they acknowledge that this is the reality of the situation.

One significant drawback of excessive trading is its potential to erode investors’ long-term gains. This concern applies to all market participants, including ourselves. In January, we published a positive recommendation on Tesla stock with a typical one-year time horizon for our stock picks. Surprisingly, within weeks of our endorsement, Tesla stock exponentially increased, surpassing our initial expectations. Consequently, we advised our readers to sell some of their holdings. Since then, Tesla stock has continued its upward trajectory.

Managing volatility is essential for both short-term and long-term investors. One strategy often employed by long-term holders is actively trading around their portfolio positions. By doing so, they can better navigate market fluctuations. Alternatively, another effective approach for long-term holders is to maintain a steadfast position and endure the inevitable ups and downs of the market. Over time, this passive strategy tends to yield superior results.

In early Friday trading, Tesla stock has experienced a modest increase of 1%. Concurrently, S&P 500 and Nasdaq Composite futures are also up, albeit by a smaller margin of 0.3% and 0.5%, respectively.

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