Travel and Hospitality Stocks Could Offer Profitable Short Sales

While Wall Street will be parsing the earnings of online review sites Yelp Inc (YELP) and TripAdvisor, Inc (TRIP) for clues on how heightened geopolitical risks and persistent recession fears are siphoning off customer cash flow, the broader travel and hospitality sector will be paying close attention to see whether the industry is finally shedding its oft-reported modest defensive qualities, and entering a downturn. The cyclicality of the travel industry is well-known despite repeated industry reports to the contrary. In a downturn, when people eat out less and take fewer trips, the industry is the first to suffer, with its capital sacrificed in favour of necessities such as food, housing and utilities.

With those review and reservation price charts looking more and more precarious, it feels like the odds are improving for a profitable short sale. Internet booking giant Expedia Group, Inc’s (EXPE) share price has lost about 20 points since it beat top- and bottom-line estimates by a good margin in July, despite a plethora of Wall Street firms bumping targets after the bullish news. That is the primary reason why I think it is particularly important this time not to rely on rear-view analysis.

Listing on the Nasdaq in mid-late December 2011, Trip Advisor found immediate acceptance in an uptrend into all-time highs at $110.24 in the summer of 2014. Following was a volatile pullback into a descending channel at the start of 2015, where a low-volatility grind saw lower highs and lower lows into the November 2017 $29.50 bear market low. Following was a 2018 channel breakout that stalled in November after reaching the 50% sell-off retracement level, subsequently giving way to renewed selling pressure in 2019.

It began a new lower sloping parallel channel in January and remains in that range seven months later. The current leg was driven into the .618 Fib retracement of the year-long throwback late in May. The stock failed to shake off that level, despite more than two months of basing activity, which puts on the side of further decline lower into the upper 3 round-trip into the depths of the 2017 low.

There will be an enormous headwind for a positive earnings reaction near $50 where channel resistance and the 200-day exponential moving average (EMA) have already pinched together. The on-balance volume (OBV) accumulation-distribution indicator is one of our few bright spots for battered shareholders, it remains relatively close to an almost four-year high, but so far at least, such bullish divergence with price has had little impact on pathetically puny price action.

Yelp debuted in March 2012 at around the low $20s and found itself in a wide trading range from the mid-teens to about the low $30s. A 2013 breakout went on an updraft with a consistent uptick that went on to a new high at $101.75 in the first quarter of 2014. It carved out a double top into 2015, broke down into a downtrend that stopped out within 50 cents of the 2012 low in February of ’16.

That bounce into November 2017 was snapped at the .382 Fibonacci retracement near $50, where it mostly traded sideways and then morphed into a failed September 2018 breakout attempt. The stock has traded down since then falling below $40 but the stock remains above 2017 support around $30 and that support is also nicely pinned to the .618 retracement of that lengthy rally. Bulls need to at least hold this floor or risk falling back into the 2016 low.

OBV peaked historically in 2014 and entered a persistent distribution mode that was only resolved in early 2016. Buying power failed at its midway point in early 2017, and the subsequent two-and-a-half-year parabolic steamrot is now thoroughly ossified and sets the stage for an eruption in acute angst as the relatively steep trendline flat lines. This pernicious lethargy is extremely worrisome because gravity could take control at any time and tumble it back down in a diaper-filling vertical waterfall. Either way, there are plenty of reasons to sell and few reasons to buy ahead of the report.

The Bottom Line

The growing earnings of TripAdvisor (NASDAQ:TRIP) and Yelp (NYSE:YELP) may even provide extra fuel to an already increasing selling pressure in the travel and hospitality space, trading within downtrends that promise to build strong short-sale profits.