One of the key points that we made in yesterday’s piece about pre-earnings expectations for Tesla (TSLA) was that its implied volatility seemed a bit low considering the stock’s propensity for big post-earnings moves. And now we’re looking at a 17% rally.
Interestingly, at money weekly options are pricing in a roughly 7.5% post earnings move. That seems low, considering that the past seven TSLA earnings reports resulted in either double digit percentage moves or something just shy (-12.33%, +12.06%, -12.13%, -9.3%, -9.74%, -9.75%, +10.97%). It is also sobering to note that only one of the last six, and two of the last seven reports have resulted in upward moves.
Options pricing can often be a contrarian indicator. If everyone is nervous, then the result can be benign, and vice versa. Today’s setup into TSLA earnings somehow simultaneously shows a bit of concern (probability, skews) and a relative lack thereof (at-money volatility). We’ll learn who is correct soon enough.
The quarter was widely reported as a blowout, and understandably so. EPS of $0.72 handily beat the $0.60 consensus, helped by an improvement in margins and the news that the cybertruck is now turning a profit. But the key was a forecast that sales could grow by 30% next year. As we noted last week, guidance, not current EPS, is the key to earnings season. TSLA hasn’t had a great track record of beating consensus recently – it missed in each of the prior four quarters – but it rose 12% after missing in Q1. It is hard to imagine today’s reaction would have been as dramatic if they simply beat on EPS.
Yet even though TSLA’s monstrous rally is a boon for its stockholders — it is now up for the year-to-date – it is not spreading into the broader market. When you have one of the top companies by market capitalization moving that much higher (as of yesterday, TSLA was #11 in SPX and #8 in NDX), it has both mathematical and psychological benefits for traders and the indices they follow. For better or worse, though, TSLA may simply be too idiosyncratic to be the unquestioned market leader that it once was. We’ve seen Nvidia (NVDA) push past TSLA in both activity and mindshare. NVDA is the prime mover in the sector that has captured the market’s zeitgeist – artificial intelligence, of course – but while Elon Musk is an inescapable presence in all sorts of news, TSLA no longer has the overall market oomph that it once possessed.
Here’s the telling fact: pre-market ES futures were up over ½% on TSLA enthusiasm, but the S&P 500 (SPX) is now flat at midday. It simply wasn’t enough to carry over completely. But it seems that there is more. Considering yesterday’s tech selloff that pushed the Nasdaq 100 (NDX) down by -1.55% and the prior 3-day dip in SPX, the reaction this morning is rather muted. Traders have been all about buying dips, and while we closed off our lows yesterday, one might have expected that the decline, combined with positive news from a stock with a key role in market psychology, should be presenting more dip buyers.
Even more curious, the lackluster equity market comes despite Treasury yields improving by 4-5 basis points. Yesterday’s tech selling seemed to be a delayed reaction to the recent jump in yields. Tech held firm as rates rose sharply on Monday and Tuesday, but succumbed yesterday. To put the bond move in perspective, 2-Year yields rose by 13bp and 10-Years by 16bp from Friday through yesterday. That’s a huge move in a short period of time. Perhaps tech is slow to notice the lower yields today? Or perhaps stocks are following my one of my mantras: “if you can’t price safe assets [like 2-year notes], it’s really hard to have confidence while pricing risky assets [like stocks].”
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