בס״ד

Closed for Stock Taking (SHOP,FARM)

Posted on November 10, 2019

We’re going online to sell the seller today, close up the shop and shut down the store.  It’s a trade that has the potential to bring in liquidation profits, so we encourage you to follow the bouncing ball and keep your feet and hands clean.

But before we get there we have a lovely trade to close.

It was opened less than three weeks ago in a letter called A Flagon ‘O the Forty Weight for Every Farmer, wherein we urged you to buy shares of FARM at the market (then trading for $14.22) and sell an equal number of DBC shares at the market (then at $15.44).  Total credit on the trade was $1.22.

And today…?

As we expected, coffee has surged.  And with it, so, too, did shares of Farmer Bros.

As of Friday’s close, FARM shares traded for $16.29 while DBC still sits at $15.61.  Sell the former and buy back the latter and you come away with your hands dripping green.  Total take is $1.90 on nothing laid out.  Adjusted for minimal commissions gives you a haul of 1167% in 17 days.

And with winter coming in, that should pay for a bottle or two o’ the yummy tum rum.

Atta Way, Huey!

Good on ya if you went in big.

And now for this week’s bet.

Friends, it’s rare we see a market this stretched.

We’ve mentioned this a few times over the last week, but it bears repeating.  The regular ups and downs that form the market’s intermediate trend often provide clues as to when those moves have grown long in the tooth and are due to reverse.

Today, by every metric we follow, a downturn is imminent…

Yet it hasn’t happened.

Can it continue?

Hard to say.

Either way, we have to stick to our knitting.  Despite the Fed, despite jawboning from the White House and despite the go-go algos, we’re going to trust what our numbers are telling us – that a 5% to 10% slide is NOW in the offing.

That’s the background.

And now we cut to the chase.

When the slide comes, weak stocks will suffer more than those who’ve led the pack, and that’s why we’re targeting Shopify Inc. (NYSE:SHOP), the Canadian based e-commerce platform that’s sucking wind as the rest of the market ascends its Everest.

Have a look –

Two items to note on the daily chart.

  • First, RSI and MACD are both sub-waterline (in green), a bearish indication that signals ongoing weakness.
  • Next, price has traced out a perfect Head and Shoulders top (in red), with the neckline at 285 – precisely where the stock now resides.

Any weakness from here would likely bring a cascade of technical selling.  Of course, any general market decline – of the sort we’re expecting – would also open up the SHOP selling floodgates.

The downside count for SHOP shares is 157!

Could it really happen?  That’s a long way down.

Consider the stock’s P/E – zilch.  Nada.  Bupkus.   (But trading with a forward earnings multiple of 323!)

It pays no dividend.

It’s Price to Book is a heady 11.93.

Hmmm…

Take a look now at the stock’s weekly chart –

Here we see the broader picture.

  1. After a 242% gain in eight months, that also triggered an extended (and rare) weekly overbought read (in green),
  2. The stock topped and turned lower.
  3. RSI is now sub-waterline, and MACD has rolled over (in blue), indicating the selling is now gaining momentum.

In short, the writing on this shop’s wall has been written, and it’s screaming SELL in a rather bold, condensed font.

That’s why we’re moving as follows –

A Jew and His Money recommends you consider selling the SHOP June 19th 390 CALL for $16.50 and buying the SHOP June 19th 230 PUT for $16.60.  Total debit is $0.10.

The CALL is currently 31% OTM.  The PUT, 22%.

With kind regards,

Hugh L. O’Haynew

 

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