You Say You Want a Revolution… (RVLV)

Today’s trade rides the back of the most overbought market we’ve seen in the last fourteen years.

Several of our own proprietary metrics are now off the charts – specifically, one ratio measure of what we term ‘cheap stocks’ vs. ‘top-outs’.  Nary have we seen a wider spread between the two.

And by far.

Saddle Up!

And it’s with that in my mind that we’ve got the saddle firmly strapped to the Revolve Group (NASDAQ:RVLV), an outfit that retails clothing online (where else?) for those seeking the threads of ‘global fashion influencers’.

Doesn’t matter that the numbers don’t really add up, of course, when you cross the world of runway fashion design with Batflu ecommerce.  It’s a conclusion foregone that the masses will buy, right?

Up, up and away, and all that, right?

Well, maybe…?

Until the revolution comes, that is.

Now, we don’t purport to any divine knowledge, per se, but we are Jews, so that should count for something, no?  The sons of prophets we are, after all…

And so we offer the following.

The Government of the United States of America will shortly pass a bill that will spin trillions of dollars in the direction of the stock market.

And Wall Street, being the clever lads and lasses that they are, will sell into all that new buying, sending the market gyrating into a brief but significant tizzy, only to move in, cat-like, to scoop up the goods at far cheaper prices after the fall.

Not sure of the time frame here, but if last year’s top-out/sell-off is any guide, we could be looking toward a late March bottom.

Fundamentals look as follows –

• Revolve trades with a P/E of 52.27,
• A Price to Book ratio of 13.53,
• A dividend yield of bupkus,
• Posts a quarter over quarter decline in sales of 2.2%,
• A one year earnings decline of 120% (!),
• And – get this – in the last six months, insiders have divorced themselves of 99.28% of their holdings!  That works out to $575 million worth of stock – if you care to ascribe meaning to such trifles.

Here’s the company’s chart for the last six months –

Technical takedown’s like this –

1. First, we have two overbought RSI signals in the last month – a big bad omen (in green),
2. MACD looks ready to roll over, and
3. A rising wedge (in red) portends a fall – when the lower edge of the pattern is violated.  Support is now at 33 and rising (price is $33.95).

One more point here – while the major market averages ascended to new highs in the last two trading sessions, RVLV spun in place.  We’ll see what that portends in the days ahead.

Now have a look at the weekly chart since the IPO in summer, 2019 –

• The weekly reveals a 20 month head and shoulders bottom pattern (in red) whose upside count was just completed last week (in black).
• We would have been happier to see RSI banging a gong at the same time, but, alas! it didn’t happen.
• Both RSI and MACD are pushing toward extremes, to be sure, and that, for now, will have to do (in green).
• We’re expecting RVLV to rotate lower toward the first of her simple Fibonacci retracement levels at $24.68 (in purple).

And the trade twists out from there.

Like this –

A Jew and His Money recommends you sell the RVLV March 19^th 30/35 CALL spread for a $2.10 credit (6.10/4.00) and use the funds to purchase the RVLV March 19^th 30 PUT for $2.50.  Total debit on the trade is $0.40.

Rationale: a decline in RVLV stock is best played with a long PUT.

Paying for the PUT, however, is not something we’re enchanted with.

Hence the sale of the CALL spread, which offers us a means of reducing costs significantly – and quantifying our risk.

Maximum gain on the trade is unlimited.

Maximum loss is $5.40 (difference between CALL spread strikes plus initial debit) should RVLV close above 35 at expiry.

Breakeven on the trade arrives at $29.60 (current share price, again, is $33.95)

Important Note: There could be a fly in the ointment for all us RVLV nay-sayers, and that’s the current short float of the stock – which stands at a whopping 25.11%, and could ignite a buying surge should something unexpected occur.

And it’s for that reason we’re labeling the trade ‘speculative’.

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew