We downgraded Tesla (Nasdaq:TSLA) on March 3. We exited the stock in our model portfolio in prices ranging from $730-830 after initially getting in at $320.

Let's see our quick reasoning and then look a little deeper. Here's what we said on March 3.

"My Strong Buys need wow and with the global risk right now I don't see expensive goods doing well. China also should see a major slowdown and Europe is seeing a major slowdown for Tesla.

We went to Strong Buy at $320 in early November, the stock is up more than a double since then.

My numbers are under review.

With big ticket items at risk globally and no sign of this epidemic slowing I want to step aside until things clear up."

First On Process, Why Did We Exit?

I need three things to have a Strong Buy on something. If I have these three criteria I'm pumped and so are subscribers. It means everything lines up.

What's also nice, and takes a little getting used to, is when just one of these three criteria fade, I'm gone.

That's so key for me. I keep it pretty simple which is important in a business with so much noise.

I don't fall in love with "stories." I fall in love with earnings. When earnings change up or down, that's what drives my opinion. That's typically what drives stock prices.

Tesla's a case where the stock has risen and fallen based on hope and disappointment on earnings specifically.

That discipline helps me avoid many stocks that end up falling apart. Admittedly I can miss things on the upside sometimes, but more important it helps me avoid big whiffs on the downside.

The point is these three criteria are my fat pitches. And when I have a fat pitch it's worth swinging and, at the right technical points, getting big and swinging hard.

That's helped our performance rise steadily in all types of markets.

Here's our three criteria:

Criteria #1) I need 45% 12-month upside potential based on our earnings one year out multiplied by a historic midpoint PE. Since Tesla didn't really have historic earnings it didn't have a PE. I've been using 45X.

Stocks can easily be down at any time 20%. So if I don't have over 40% upside then I'm asking for less than 2-1 reward-risk. That's no good.

Criteria #2) I need my quarterly numbers above the Street. It doesn't mean my numbers are spot-on necessarily. They're my guide. But I need the flow of history plus the likelihood of operations to lead to my quarterly model (my income statement) higher than the Street.

If I have one of my upcoming quarters showing the risk to miss the Street, then the stock has a clear risk potential. You've seen it many times. Stocks that miss earnings go down. Stocks that beat can move up.

So I rely on my earnings numbers and need them higher than the Street.

Criteria #3) This is probably my most important criteria to keep me out of trouble. It's pretty simple and designed through 20 years-plus of institutional analysis and trading. I need "wow." Wow means just that, I can easily say wow to the story or the numbers and nothing's really holding me back from getting exciting.

Can you honestly say "wow?" That's my litmus test.

Wow means that there's no clear and present dangers coming that could risk my quarterly EPS progression or anything major with the story.

I speak to my company's under coverage quarterly. I respect the news out there. And if I can't eke out an honest wow, then I can't be there.

When we started seeing the coronavirus numbers spreading in the world we started exiting all but one of our Strong Buys and Tesla was one of the exits.

By March 5 we were only left with one Strong Buy Rating when assessing the potential risk to global demand.

Using Technicals To Help Too

I told you above my criteria for having a Strong Buy. Now let me tell you my general criteria for trading. I follow a three-step rule for trading and this helped us get of many longs and get our portfolio short using ETFs on Feb. 24.

So while we were exiting stocks through March 5 we already had a net short bias in the portfolio.

I think trading should follow simple rules.

I care about three things in trading:

1) Fundamentals: Like we said above we want things to line up with earnings.

2) Technicals: Simple direction, is it going up or down.

3) Not letting losses run too far

Those are three key simple steps for trading. I believe if you follow them it can help you out enormously, especially in rough market periods like this one.

When criteria 1 and 2 are equal it's time to go big. If not it's good to respect markets and not go big.

And if 3, losses start building it's good to cut to a small size. Because as much as you love something the market can have different intentions. I always want to respect markets. I've heard of markets putting a lot of people out of business and making a lot of people rich. So it's good to respect Mr. Market.

And we know small losses can lead to big losses. Like a retailer cutting goods that don't sell. Small losses are an important alert.

We had a key (NYSEARCA:SPY) level of 331 and when we saw the market break that on Feb. 24 we decided to cut a lot and get net short using ETFs.

That was the first break of the market.

So when we had wow gone for Tesla and a market break and losses from the highs building, it was pretty easy to cut.

If you have rules that you know work, it's pretty easy to stick to them.

A trader with no rules is asking for trouble. But a trader with simple rules that they've seen work, that they can stick to, helps a ton.

I've been doing this a long time and I think the biggest problem a trader or investor has is they don't have any rules they are living by.

Trading needs to be like any business. We're trying to drive P&L. I don't think there's many businesses where the owner is happy to rack up losses. But for whatever reason though traders don't like cutting when they see losses, letting emotions win. But if it were another business they would cut. We try to do the same here in trading.

Losses in an idea are a key data point for us.

Back To Tesla

So when logic led us to see global risk, meaning earnings risk, we had to cut.

First we saw that Europe sales were plunging.

In early March Tesla was reported to only register 83 new cars for February in Norway. Norway was a big driver in Q4.

The Netherlands saw a 68% drop in sales in February.

At the same time China was at about 80,000 coronavirus cases.

As a side note our global fundamental research has now simplified to simply tallying the number of new virus cases each day. We hope and pray it slows down. If it doesn't there's no end in site for business shutdowns.

As another side note we're at the end of the longest economic expansion in modern history. Typical economic expansions end in a slowdown and markets get crushed on slowdowns.

This record economic expansion though is not ending on a slowdown, it's ending on a shutdown. I don't want to get cute and try to pick bottoms when the world is in shutdown-mode after the longest expansion in the modern era.

You have two extreme forces at play right now.

It's fair that not many companies stand a chance to have good results.

China Sales Down

Most recently in China, Tesla's sales are reported to be down also. China was the company's key growth engine in 2020.

Tesla saw registrations down 35% in February. That was much better than the industry down 79% but that's not going to help us hit our original earnings numbers.

Europe and China were actually the two main growth engines for 2020 and they are both showing signs of a slowdown.

Factory Shutdown

And after not fully giving in Tesla has decided to shut down some facilities. Here's what they said on Thursday,

"As such, we have decided to temporarily suspend production at our factory in Fremont, from end of day March 23, which will allow an orderly shutdown. Basic operations will continue in order to support our vehicle and energy service operations and charging infrastructure, as directed by the local, state and federal authorities. Our factory in New York will temporarily suspend production as well, except for those parts and supplies necessary for service, infrastructure and critical supply chains."

Companies can always deliver from inventory but key to Tesla and all OEMs is production. Forgoing production means forgoing revenues in the near term. That's a clear risk to revenue targets and so earnings.

This is not just a risk for Tesla of course. This is a clear once-in-a-lifetime risk for most companies. Shutting down means shutting revenues and earnings potential.

That's why stocks are dropping big. Stocks care about earnings and earnings are about to drop fast when reported in April.

Street Earnings Too High

We're at an EPS loss for Q1 and Q2. But the Street is still higher at $.46 for this quarter and a $1.24 for next quarter.

So there's a big miss potential coming.

When Will It Turn?

As I mentioned above we're watching one metric right now. The number of new coronavirus cases is the most important fact in the world right now. Obviously personally this and the government clamp down has touched everybody in one way or another. But also for business, this is the most important stat.

When new cases start slowing businesses can have a chance to get back on their feet again.

Until then whatever anybody's estimates are for a bottom they're probably too high.

Conclusion

Tesla's on the cusp of an earnings inflection. But that turn up just got pushed out along with the rest of the world.

Tesla's much more volatile and that risk up and down needs to be respected.

I would expect as long as the number of new coronavirus cases continues then Tesla and many companies have risk.

When that new case number starts to slow or flattens (like in China) then stocks and their businesses can hopefully get back on track.