Why Now’s The Time To Short Retail Stocks!

| May 15, 2009 | 0 Comments

Last weekend I did something most fathers dread.  I took my two daughters (ages 8 and 12) clothes shopping.  Summer is fast approaching and it’s time to replace all the summer wear they’ve outgrown.

Don’t get me wrong.  I love to spend time with my girls.  But, I’m not a shopper.  Especially, when it involves picking out clothes for two pre-teen girls.

They don’t make up their minds very easily.  And, they usually try on every article of clothing in the store.

We went to Desert Ridge.  It’s a huge open air shopping mall with what seems like hundreds of stores.  We walked for miles and miles going from one store to the next.

As we walked around, I noticed something very unusual.  A number of stores were completely empty.  And, several popular restaurants had completely closed up shop.

I was shocked.  I didn’t expect to see empty stores and abandoned restaurants at one of the busiest shopping centers in Scottsdale.  But, that got me thinking.

Perhaps, the retail industry is having a tougher time than most people think.  You certainly wouldn’t know that by looking at their stock prices.

Just take a look at the SPDR Retail ETF (XRT).

It’s up an amazing 48% in just the past two months.

How could this happen?

Aren’t we in the worst economy since the Great Depression?

It all comes down to expectations.  After six straight monthly declines, retail sales rose unexpectedly in January and February.  Many believe this means consumer spending has bottomed out.  And, people are ready to open their wallets again.

Low share prices also proved too tempting to resist.  A number of retail stocks were trading at or near 52-week lows in early March.  Investors seized on the positive sales data and began scooping up retail stocks at bargain basement prices.

Once the buying began, it set off a chain reaction.

Short interest on the retail stocks was at extremely high levels.  When the tide turned, the shorts started covering their positions.  All this buying helped extend the rally in retail stocks.

Too far, too fast?

I think so.

Let’s face it.  Most Americans are still worried about losing their jobs. And, everyone’s feeling poorer thanks to falling home prices and crushed investment portfolios.

Then April retail sales fell 0.4%.  The declines were widespread throughout the sector.  Department stores, general merchandise, specialty clothing, furniture, electronics and convenience stores are all reporting falling demand.

Clearly, expectations of a recovery were over-optimistic.

Consumers are experiencing a broad-based shift in attitudes.  People are no longer buying whatever their hearts desire.  Frivolous spending fueled by easy credit is a thing of the past.

Consumers are now focused on paying down debt and increasing their savings.  Not buying a new car, replacing home appliances, or upgrading their wardrobes.

Don’t believe me?

Just take a look at the growth in personal savings.  Last year, the personal savings rate stood at just about zero.  This March, it’s up to 4.2% and rising.  Some experts believe it will double from here before consumers feel confident enough to start spending again.

All this suggests the rally is overextended.

Here’s how we can profit from the situation.

One way is to establish short positions on specific retail stocks.  However, this strategy is not really appropriate for most investors.

A second way is to buy put options.

A few retailers to look at are Macy’s (M), JC Penney (JCP), and Joseph A. Bank (JOSB).  You can also buy puts on the SPDR Retail ETF (XRT).

A third way is even easier than the prior two.  Buy an inverse ETF.

Buying an inverse ETF is just like buying a share of stock.  You can buy them in a regular brokerage account.  And, you don’t need a margin account or options trading approval.

Take a look at the ProShares UltraShort Consumer Services (SCC) inverse ETF.  This fund is designed to provide returns 2x the inverse of the Dow Jones U.S. Consumer Services Index.  (In other words, it goes up when the consumer services sector falls.)

Take note, this is a “leveraged” inverse ETF.  The leverage involved can cause very wide price swings.  And, sometimes the ETF’s share price may not precisely correlate with the underlying index.

Whatever you decide to do, remember the time horizon for this trade is very short.  You’ll need to keep a close eye on your position.  Exit the trade at the first sign the downturn has run its course.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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