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US Stocks Rise on China Stimulus, Tesla Short-Squeeze – But is Rally Sustainable?

James Hyerczyk

U.S. equity markets rose sharply on Tuesday, erasing Friday’s steep losses while raising a few questions. Are investors buying stocks because of future earnings? Are they investing because Treasury yields are low and they can’t get any return anywhere else?

Is this a reaction to China’s plan to flood their markets with additional stimulus? Is this a vote of confidence for President Trump and expectations of his reelection?

There are some that say, who cares? There are some that say, the trend is your friend, just go with it. And there are other who say, can the rally to all-time highs in the NASDAQ Composite be sustained by a volatile stock like Tesla? Or have we just entered the bubble of irrational exuberance again? After all, is it buying driving Tesla higher, or is it scared shorts, willing to pay anything to get out?

On Tuesday, the benchmark S&P 500 Index settled at 3297.59, up 48.67 or +1.49%. The blue chip Dow Jones Industrial Average finished at 28807.63, up 407.82 or +1.41% and the technology-based NASDAQ Composite Index rose 9467.97, up 194.57 or +2.12%.

Reuters Exclusive: China Readies More Measures to Stabilize Economy

Chinese policymakers are readying measures to support an economy jolted by a coronavirus outbreak that is expected to have a devastating impact on first-quarter growth, policy sources said.

The sources said the government is debating whether to lower the planned 2020 economic growth target of around 6 percent, which many private sector economists see as well beyond China’s reach.

With the death toll from the virus epidemic climbing to over 420 and risks to growth mounting, China’s central bank is likely to lower its key lending rate – the loan prime rate (LPR) – on February 20, and cut banks’ reserve requirement ratios (RRRs) in the coming weeks, said the sources who are involved in internal policy discussion.

“Currently, monetary policy is being loosened, but the central bank will follow a step-by-step approach and watch the virus situation,” said a policy insider.

In order to minimize job losses, China’s stability-obsessed leaders are likely to sign-off on more spending tax relief and subsidies for virus-hit sectors, alongside further monetary easing to spur bank lending and lower borrowing costs for businesses, according to the policy insiders.

“We have policy reserves and will step up policy support for the economy. The most urgent task is to put the virus outbreak under control,” said a source who advises the government, who spoke on condition of anonymity.

Tesla: Short Squeeze or Real Buying?

A billionaire investor in Tesla, Ron Baron, said on Tuesday he believes Tesla will hit trillion in revenue in 10 years and continue to grow from there. Well, he has a vested interest in the stock. His investment firm holds nearly 1.63 million Tesla shares – worth more than $1 billion at current levels.

“It’s nowhere near ended at that point and time,” Baron said on CNBC. “There’s a lot of growth opportunities from that point going forward.”

Ark Investment Management founder Catherine Wood told CNBC last month she believes Tesla could be worth more than $6,000 per share in the next five years – upping her prediction of $4,000 a share she made two years earlier.

Some Wall Street analysts are not so sure Tesla’s gains will last, and even political activist Ralph Nader chimed in, saying in one tweet: “Watch out Tesla believers.”

“When the stock market bubble implodes, it will have started by the surge in @Tesla shares beyond speculative zeal,” Nader said.

Will Tesla be able to carry the NASDAQ Composite into the stratosphere? I don’t think so. Are investors really getting long at $900 per share? I don’t think so either. This current rally is all about hope, fear and greed.

The momentum is huge and there is a fear of missing out with investors chasing the market higher.

Furthermore, the aggressive short-sellers are paying anything to get out. They are driving the market higher, not real buying.

Those betting against the stock are down more than $8 billion since the beginning of the year, according to S3 Partners. Since Tesla’s stock was under $200 a share in June, the first said short sellers have covered $12.6 billion worth of stock.

That’s a factor that is likely fueling Tesla’s current rally: If enough short sellers buy in tandem, it can create higher demand and itself drive the equity price even higher, a phenomenon also known as “a short squeeze.”

If the shorts regain control, and Tesla begins to plunge back to earth, say to the $300 range, will this take the NASDAQ Composite with it? I think it will.

This article was originally posted on FX Empire