Selling Short Not the Way to Go for Retail Numbers

Consumer confidence for June remained above the key 100 level at 103.9, but it was below the 106 reading expected by economists and the 108.5 reading in May. The June reading was also the lowest in nearly a year. It is not a concern now, but watch the number as a further decline in July could signal a potential trend reversal. This would not be welcomed by the markets. On the other hand, lower consumer confidence could pressure the Federal Reserve to cut interest rates later in the year in order to help pump up the U.S. economy.

The recent retail sales numbers were below estimates, with retail sales — excluding auto — falling 0.4% in June versus an estimated 0.2% increase, and well down from a 1.6% rise in May. The headline number fell 0.9% in June, the biggest decline in two years.

We saw some soft same-store sales from key retailers, which could point to some concerns on the part of consumers. Higher gasoline prices for shopping trips and higher financing rates for big-ticket items and paying off credit debt are also cutting into the consumer’s disposable income and what they have to spend. The majority of people have fixed budgets. Of course, as retail sales account for about two-thirds of the GDP, it is critical. The soft housing market is also to blame.

A positive was bellwether Wal-Mart Stores, Inc. (NYSE/WMT), a good indicator of the retail sector. It is reporting a strong 2.5% year-over-year jump in its June same-store sales, while overall sales surged nine percent year-over-year. But there are also duds.

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If you are currently holding retail stocks, here is what you may want to consider. Given the neutral sentiment toward retail stocks, you could write some covered call options to generate some premium, thus reducing the overall average cost of the stock in question.

If you are negative on the retail sector and want to short, I would suggest you reconsider, unless you have a stomach for risk. If you need to short, please place appropriate stop buys on the short position, or you could find yourself sucking air should the stock stage a strong rally. A better alternative to shorting would be to buy put options or initiate bearish put spreads.