Tsla Model X
Prototype of Tesla Model X, to launch later in 2014. Source: Tesla Motors.

Tesla Motors (NASDAQ:TSLA) has lapped the market in 2014 -- 10 times over. The electric-car maven's shares have gained 55% year to date, while the S&P 500 only increased by 5.5%.

As the stock raced higher, many investors bet against Tesla. The company has never reported a quarter of positive GAAP earnings, has burned $93 million of free cash during the last year, and generally raises hackles all around the automobile industry it disrupts.

That's fine. Short sales are an important part of a healthy market. There's nothing wrong with making money if Tesla's big profits never materialize, or if the stock has been traded up to unsustainable prices, or anything else goes wrong with CEO Elon Musk's electric dreams.

But then there's this chart:

Data from Nasdaq.

As you can see, Tesla's short-sellers appear to be setting themselves up for a terrifying short squeeze. It's taking longer and longer to cover the existing short positions out of Tesla's average daily trading volumes.

Hold that thought for a minute. Let me just remind you that the auto industry is no stranger to enormous short squeezes.

The classic example is Volkswagen (NASDAQOTH:VLKAY). At the end of October, 2008, fellow German automaker Porsche bought a controlling 74% stake in Volkswagen as part of a hostile takeover attempt. But 13% of the stock was sold short at the time, and less than 1% of Volkswagen shares changed hands in a regular trading day.

In a panic, Volkswagen's short sellers had to liquidate their positions very quickly. Share prices quadrupled overnight, making a few fortunes, and destroying others. For a couple of hours, Volkswagen had a $364 billion market cap, all thanks to this sudden reversal in shorting fortunes.

The next day, Volkswagen shares fell 40%, and things went back to normal. The short squeeze was over -- but what a hurricane it was!

So, is Tesla headed for a sudden jolt like Volkswagen's 2008 adventure? The chart above might suggest as much, as the "days to cover" metric is climbing through the roof.

Well, not so fast.

For one thing, six days to cover is not a huge number. The real heavyweights in the short-sales game often require a month or more of average trading before closing out their very large negative bets. Less than a week? Bah! That's nothing in the grand scheme of things.

For another, consider this chart:

Data from Nasdaq.

Yeah. Days to cover may have skyrocketed lately, increasing by 85% during the last three months; but the number of shares sold short decreased 4% to land at 24.6 million. The real driver of that first chart is a 48% drop in average daily trades.

Long story short, Tesla is not headed for a showdown at high noon with the short sellers. Sorry to disappoint the day traders out there, but that's the truth.

It's just that the overall trading interest in Tesla shares is falling quickly. That's actually fairly normal as the market heads into the lower-volume summer months, not to mention the lull before July's earnings season kickoff, and the industry-specific lack of new product announcements at this time of year.

There may be many reasons to buy Tesla stock right now, as I did a couple of weeks ago -- but gunning for a tremendous short-squeeze payday is not one of them.

Warren Buffett's worst auto nightmare (Hint: It's not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to invest in this megatrend. Click here to access our exclusive report on this stock.

Anders Bylund owns shares of Tesla Motors. The Motley Fool recommends and owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Compare Brokers