Retail Sector Could Be in for a Slump

Consumer confidence from the Conference Board was released on Tuesday and it was not encouraging for the condition and direction of the U.S. economy. The reading for the November consumer confidence fell to 87.3, down from 95.2 sequentially. This represented the lowest level since an 85.2 reading years ago in October 2005. Credit concerns and the housing market are driving the negative sentiment, with the high oil prices near $100.00 a barrel also a key factor.

 The fear now is that the weakening in consumer confidence will translate into weak retail sales. We will see if this pans out as we head into the prime shopping season after Thanksgiving. There is mounting concern that retailers could be hurting. The Expectations Index, a measure of how shoppers feel over the next six month, fell to a lowly 68.7 from 80.0.

 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 have fixed budgets and higher financing costs will reduce money available for other purchases.

 The biggest impact of declining consumer confidence would be on spending, especially on big-ticket items. If you are currently holding retail stocks, here is what you may want to consider. Given the neutral sentiment towards retail stocks, you could write some covered call options on your stocks to generate some premium, thus reducing the overall average cost of the stock in question.

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 Avoid retailers at this time. 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.