Hard Times In Front of Restoration Hardware?

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RH had a tough day on Friday. The market didn’t like the lack of sales growth and sent their shares 20% lower near the $100 mark. Since $100-105 has acted as resistance before, many assume that it can act as a support today.

RH is a highly shorted stock with a tiny 18-million shares float. 35% of its float is short. If enough short sellers decide to cover near $100, we might see a dead-cat bounce to 110-115 in a short-term perspective.

From a longer-term perspective, things are not that rosy for RH. The CEO of the company borrowed heavily in the past few years in order to buy back RH shares. As a result, RH became highly leveraged with a debt/equity ratio of 37 and its outstanding shares have declined substantially: from 40 million to 27 million shares. The drop in outstanding shares is the main reason why RH can report a 75% earnings growth along with 0% sales growth.

To sum things up: RH is leveraged to the hills, it is in the highly cyclical overpriced furniture business and its sales are not growing. The company borrowed a lot of money to buy back its own stock at a very high price. When the next recession comes, I won’t be surprised to see RH trading under $10 per share. People should treat it as a short-term trading vehicle and not as a long-term investment.

I have no position in RH.

Check out my last two trading books:

Swing Trading with options – How to Trade Big Trends for Big Profits

Top 10 Trading Setups – How to find them, hot to trade them, hot to make money with them.

Top 1% Stocks To Keep An Eye On

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High-momentum stocks can be excellent sources of swing trades because they tend to make big moves in both directions. Here are a few stocks with a relative strength rating of 99 that might offer good opportunities in the next few days/weeks:

AMRN bounced from its rising 50-day moving average. It needs to clear $20 to get me interested on the long side.

CRON – cannabis stock working on a high tight flag. It needs to clear $22 – 22.30 to get me interested.

SE – a few days tight of tight-range consolidation near its all-time highs.

Check out my last two trading books:

Swing Trading with options – How to Trade Big Trends for Big Profits

Top 10 Trading Setups – How to find them, hot to trade them, hot to make money with them.

Five Stocks With Big Earnings Surprises

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Stocks that receive favorable market reaction after reporting big earnings surprises tend to keep going higher in strong bull markets. Some recent examples include MELI, IONS, ZS, and TNDM.

A favorable market reaction is a high-volume range expansion to new 50-day high – a gain of at least 5% on at least 2x the average daily volume.

Here are some stocks that went up immediately after their earnings report after beating estimates by a wide margin that might be setting up for another leg higher:

EXEL broke out from an eight-week base.

GKOS pulled back all the way to its 50-day moving average where it bounced and now it is setting up again for a potential breakout.

DXCM didn’t gap up after their big earnings surprise but managed to consolidate in a tight range near its all-time highs and it is now setting up for a potential breakout.

Check out my latest book: Swing Trading with Options – How to trade big trends for big returns.

Momentum Monday – Looking for Relative Strength

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The major U.S. stock indexes pulled back from areas of major resistance. $280 for SPY, 175 for QQQ, and 160 for IWM (Russell 2000). Is this the beginning of a significant leg lower or just another garden-variety shallow correction. Judging by the price action in many momentum stocks, it looks more like the latter.

Momentum stocks are often leading the market, higher and lower. If the market declines and most momentum names go sideways or even try to break out, the correction is most likely a buying opportunity. This is exactly what are seeing in the current market.

Keep in mind that no indicator has a 100% success rate. If some unexpected news comes out of nowhere and surprises the market, those same momentum stocks will get hit hard and will fall with the rest of the market. This is why I am using the expression “most likely” – it’s a probability, not a certainty.

Check out my latest book: Swing Trading with Options – How to trade big trends for big returns.

The Best Performers of the Past 10 Years

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This week marks ten years since the bottom of the Great Recession in March 2009. Since then, the S&P 500 has almost quadrupled (total return), Google is up 6x, Apple is up 9x,  AMZN has gone up more than 20x, and Netflix is up 54x (after experiencing an 80% drawdown along the way).

In March 2009, the market was in panic mode. Many stocks were trading like their companies were going out of business. This is why many of the best performers in the past decade were under $5 per share (some were even under $1 a share). Bear markets create incredible long-term opportunities, but most people are not psychologically equipped to take advantage of them. Holding big winners for the long-term is never as easy as it seems in hindsight.

In the past decade, there are 235 stocks that went up more than 1000%.

Out of them, 81 gained more than 2000%.

Out of them, 42 increased more than 3000%.

Out of them, 14 rose more than 5000%.

With returns like these, who needs angel investing?

Here are the top five performers for the past decade:

1.PATK +21,546%

2. JAZZ +15,010%

3. NXST +14,713%

4. MGPI +10,940%

5. MITK +10,720%

Check out my latest book: Swing Trading with Options – How to trade big trends for big returns.