More evidence of the sluggish sales in the retail sector emerged last week, as retailers released some soft numbers that rocked the stock markets on Thursday. Investors are extremely nervous that the economy may be worse than expected. With the massive $160- billion stimulus program coming to an end, its impact on the economy appears to have been limited, so there are reasons to be concerned. With consumer spending accounting for two-thirds of GDP, the fear is real.
There is now concern that retail sales heading into the fourth quarter will continue to be weak, especially given the upcoming key post-Thanksgiving shopping period heading into Christmas, which for many retailers is the key shopping period of the year.
While oil has been declining, at over $100.00 a barrel, it remains high and will impact spending. Add in the declining prices in the housing market and issues in the mortgage and credit markets and you have a nasty climate for confidence and spending.
In addition, debt levels are continuing to expand and will become more of a concern going forward, as consumers watch their disposable income fall. A good majority of people has fixed budgets and higher financing costs will reduce money available for other purchases.
Watch for the retailers in the upcoming fourth quarter. If you are currently holding retail stocks, here is what you may want to consider. Given the bearish sentiment towards 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 vulnerable should the stock stage a strong rally. A better alternative to shorting would be to buy Put options or initiate Bearish Put Spreads.