Retail Stocks Offer Favorable Risk to Reward for Short Opportunities
April 21st, 2009>>>Market Analysis>>> In looking at the outcome of a potential stock market sell-off, the more obvious low hanging fruit are the financials (e.g. XLF down -11.16% on Monday). However, since many of my investment strategies are derived from the theme of a weaker consumer base, I am quite pleased that the Retail Holders ETF (RTH) was only down -3.88%. This means there is still some meat left on the bone and a better risk to reward ratio for bears looking on the prowl for short candidates.
In these economic times, consumers, who are still employed, are increasing their personal savings rates while those without jobs are spending less by default. Banks have also reduced the volume of consumer loans they normally make. All of these are the results of the deleveraging process that continues in the U.S. economy which is dependent upon 70% consumer spending.
A glance at the chart below shows that the RTH has broken its uptrend channel and if it violates support @ 75.34 level, there’s quite of bit of downside left (see retracement levels on chart below). The RTH is overbought and has exhibited clear signs of divergent weakness as both its volume and MACD have steadily declined. This is a classic sign of distribution into deceptive market strength.
For those willing to assume more risk, they may also consider some of the exchange traded fund’s more vulnerable components: BBY; COST; HD; KSS; LTD; M; RSH; TGT; TJX. These symbols represent companies where consumers are more likely to spend their discretionary income. In the interest of keeping this article brief and to the point, it is practical to exclude charts for all the above. However, if one has the time and resources to look at some of these, they will find similar bearish patterns comparable to the RTH.
(Note that I have avoided names that reflect consumer staples like grocery stores, discounters, drug stores, and online-retailers as their business models may be more resilient in this economic environment. Also this report is merely a starting point and investors are strongly encouraged to do their own homework to determine if these companies meet their requirements for short candidates.)
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