As we’ve discussed this week If a stock doesn’t reverse the day after a strong drop post a poor earnings report the likelihood is it’s going lower, traders have an old saying going back to the floor days when it comes to trading aggressive moves i.e. gaps down come in 3 stages, “the initial gap, the acceleration gap and the exhaustion gap”. In other words people looking to get a bargain should at least wait for 3 strong down days before pressing the accumulation button.
Reece (REH) reminded me of this characteristic yesterday as it fell another -7.4% after being whacked on Wednesday taking the weeks decline from its all-time high to over -20%. We believe the REH result was messy but the biggest issue was after tripling post the COVID outbreak this was a crowded trade with the stock priced for perfection, a mantle it failed to match. Their earnings report showed solid sales however costs where a lot higher than anticipated which is not good. Companies on high valuation due to solid growth need to show strong operational leverage (i.e. expanding margins) and that wasn’t the case with REH this week. We can see another 10% downside in the weeks / months to come.
MM will consider accumulating REH closer to $18
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