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3 Stocks to Sell in January

The retail sector is looking particularly ugly this month

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With stocks extended and sentiment at extremes, the market has been taking a breather so far in 2014 with the major averages off to their worst start to a year since 2005.

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Negative catalysts are beginning to reappear. Partisan rancor has returned to Washington and another debt ceiling fight looms as politicians cross swords over extending unemployment benefits. Emerging-market stocks are breaking down. The Federal Reserve looks ready for more tapering, pulling back on its bond purchase stimulus as interest rates rise.

As a result, more opportunities for stocks to sell and even short are popping up on my screens — with a focus on retailers. There’s good reason for this: The 2013 holiday shopping season was a dud because consumers were pressured by stagnant wage growth and a higher cost of living that resulted in a dip in savings and an increase in borrowing. Without a turnaround in wages, this isn’t sustainable.

According to ShopperTrak, store foot traffic dropped nearly 15% this holiday season, a huge decline from the 2.5% increase seen in 2012. Retailers also over-purchased, and given weak sales, are burdened with too much inventory. That’ll pressure profit margins when Q4 earnings are released.

That sets up the following look at three retailers to sell or short right now:

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