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Tesla

stock is down again Wednesday while the

Nasdaq Composite,

home to many richly valued tech stocks including Tesla, keeps going up. Tesla’s recent trading action might be disquieting both Tesla bulls and bears. Not all that much is going on, though. These are just the dog days of summer. Still, there is one issue to watch as electric vehicle makers start to report second quarter results.

Shares are off about 2% in midday trading Wednesday. The Nasdaq Composite is up slightly. Month to date, Tesla (ticker: TSLA) stock is down almost 5% while the Nasdaq has rallied 1.2%. What’s more, Tesla is still off about 28% from its $900.40 52-week high, set back in January. The Nasdaq hit a new high on Wednesday.

It’s tempting to look for a good fundamental reason for the divergence. There have been some recent articles about the safety of Tesla vehicles that might be impacting investor sentiment this week. Still, it doesn’t feel enough to justify the drop. And for every potential recent negative there is a recent positive.

Morgan Stanley analyst Adam Jonas, for instance, pointed out on July 1 that Tesla was stepping up management recruiting in the country. That’s a positive that bulls can hold on to. Tesla moving into India could mean a lower priced EV and expansion into another market.

Jonas is a Tesla bull rating shares Buy. His price target is $900 a share.

A better reason for Tesla’s recent trading pattern is that EV stocks, including Tesla, started to recover before the Nasdaq.

EV stocks–including shares of Tesla, startups such as

Fisker

(FSR) and Faraday Future, which is merging with SPAC

Property Solutions Acquisition

(PSAC), and Chinese EV maker

NIO

(NIO), among others–all hit their 52-week highs around January and February.

Then investors started to worry about growth because of a global semiconductor shortage that hampered auto production around the world. Most EV stocks are richly valued and investors expect rapid expansion of sales and profit margins. What’s more, interest rates rising also hurt EV stocks.

Rates started to rise around February. Higher rates hurt highly valued growth stocks more that others because it makes financing growth more expensive. What’s more, growth companies generate most of their cash flow years down the road. Higher rates reduce the value of that cash in today’s dollars.

But the semiconductor shortage faded, rates stabilized and Chinese EV sales continued to growth rapidly year over year. China is the largest new car market in the world and the largest market for new EVs.

EV stocks, as a result, have gained more than 20% on average while the Nasdaq and

S&P 500

rose about 7% and the

Dow Jones Industrial Average

gained roughly 4%.

Tesla stock, however, is down about 3% over the past three months. Given how the other EV stocks have responded, Tesla’s missteps in China might be most responsible for weighing on investor sentiment. Tesla suffered some bad PR from how it handled a brake complaint, and the company issued a technical recall to fix an issue with its cruise control. It was a recall, but the issue was fixed with an over the air software update. The cars didn’t have to go into any service shop for a fix.

Looking ahead, China appears to hold the key for Tesla and most EV stocks for the second half of 2021. Of course, company specific factors can impact stocks. But more Chinese growth should equal more EV gains, regardless of what the overall market is doing.

Investors will be looking for updates about Chinese sales, production and demand when Tesla reports earnings later in July. Tesla delivered more than 200,000 vehicles in the second quarter, a record for the company. But Tesla doesn’t break down quarterly deliveries by region.

Guidance from NIO and its peers about third quarter deliveries will also be another key data point. NIO management to hit the high end of its second quarter delivery guidance, despite production problems caused by the chip shortage.

Tesla should report numbers around July 22. NIO should come in the first weeks of August. Neither company has confirmed its earnings reporting date.

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