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PURE MOMENTUM. There’s Precisely No Value Here. (RH)

Posted on April 29, 2021

We’re taking on a monster today, so suit up your armor, and remember the chain mail.

This sucker’s gonna be a tough one.

That’s right, your college degree won’t get you much leverage today, either – not that it was worth much, anyway.

As a wise man once said –

“A college degree is proof positive that the recipient had the funds to pay for it.”

Hoo-hoo! And ain’t it the truth…

That said, let’s get straight to it.

We’re trading Restoration Hardware (NYSE:RH) today, makers of home furnishings in the classic style and for the same price – but without the genuine classic quality.

As the title of today’s correspondence suggests, we’re not so fond of RH stock at this price, and short of calling the police, we’re doing everything in our power to take this sucker down.

Before we get to the charts, though, consider a few fundamentals.

  • To begin, P/E is now a Jim-dandy 75.82, while
  • The Dividend Yield is BUPKUS.
  • Price to Book is an obese 33.01, and
  • Both Debt/Equity and long term D/E are approaching 2.5!

In other words, you’re dealing here with an overeducated, con-artist antique merchandiser.

They’re the Worst Kind!

Next earnings come in June, and, yes, analyst revisions are nudging higher, but not with the same oomph! we’ve witnessed over the last two quarters.

Moreover, the company’s website now lists the following warning at the top of their homepage –

AN IMPORTANT DELIVERY UPDATE. We’re experiencing delays due to challenges from COVID-19 and its impact on our production partners and the global supply chain. We’re doing everything possible to improve the situation, and appreciate your patience.

Can that be good?

Now have a look at the charts.

We start with the daily –

Technically –

  1. We have an overbought RSI read (in green).  Bearish.
  2. A rising wedge formation (in black) that’s quickly tightening.  Also bearish.
  3. Numerous gaps that need filling (in blue) after a 900+% rise this year.  Could be VERY bearish.
  4. And Fibonacci retracements (in purple) that correspond to a) the major moving averages, and b) two gaps that require filling.  They arrive at 476 and 322.

Now, check the weekly and (part of the) monthly charts –

  1. We’ve appended the monthly RSI chart to the bottom of the weekly (in green) to show you just how insane the current overbought situation is.
  2. In addition, we’ve boxed the last two RSI overbought conditions and their resultant price consequences (in red).
  3. We leave you to determine what this latest overbought RSI indication will bring.

For our part, though, the lesson’s been learned.

We’re going head-to-head today with the scoundrels at RH, challenging them to a joust, and offering the rest of you the following –

A Jew and His Gold recommends you consider selling the RH August 20th 1000 CALL for $8.30 and buying the RH August 20th 480 PUT for $8.20.  Total credit on the trade is $0.10.  Place a STOP buy on the shares at $1000.

Rationale: the trade is constructed in anticipation of a fall and with an eye to minimizing costs.

The short CALL is $280 (39%) out-of-the-money, and therefore possesses minimal risk – even given RH’s price history and momentum.

Currently, all factors are militating against a rise of that nature before August expiry.

We’ve selected the PUT with the (480) Fibonacci retracement in mind, as well as support from the rising 137 day moving average.  A decline to that level represents a 33% loss.  But the stock could easily fall further from there.

We’ll very likely close the trade on any immediate weakness, or any instance in which the value of the PUT begins to overwhelm that of the CALL.

Maximum gain on the trade is unlimited.

Maximum loss is Nil (with proper STOPs in place).

Remember to reset a STOP sell at $1000 should the STOP buy be triggered.  And then a new STOP buy at the same level, should the STOP sell get filled.

Many happy returns,

Matt McAbby.

 

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