The bad economic news and reports just keep coming. Europe clearly faked its bank stress tests, June U.S. new-home sales were the second worst on record, and jobless claims were higher than estimates.
And there is new data that strongly reinforces our bearish position on housing and consumer spending.
A recent University of Michigan consumer confidence survey was down for the third month in a row. The fall in confidence is down to 50.4. A reading below 50 means the consumer is saying “things are going to get worse.” It seems consumers’ fearfulness is based on a view of the real world many on Wall Street don’t see.
In addition, the latest consumer spending survey from ChangeWave Research released last month showed a “major pullback in U.S. spending behavior going forward, coupled with a continued deterioration in consumer sentiment and expectations.”
The survey also pointed to a slowdown for several spending categories, including travel/vacations, restaurants, electronics and consumer durable goods. And it showed future weakness for key discount retailers Costco Wholesale Corporation (NASDAQ: COST), Target Corporation (NYSE: TGT) and Wal-Mart Stores, Inc. (NYSE: WMT).
How are we going to play this?
The obvious first stop for us (and Wall Street when it catches up with this data) is retail.
First, there was a slowdown in electronics and home durables — the big-ticket items that impact overall retail sales data that drives trades.
Second, back-to-school season is upon us, and a disappointing sales season — which the survey is predicting — will give us an immediate tailwind behind our retailing positions.
Before the latest sell-off, the retail sector had risen sharply for many months in anticipation of a recovery and because most retailers are quite well managed and have the ability to ruthlessly cut costs in a relatively short period of time.
The best way to play the segment is through puts on the SPDR S&P Retail ETF (NYSE: XRT). XRT covers the entire segment and includes many of the retail chains that will feel the pullback the most: clothing, specifically teen and women’s clothing.
It also has the broadest base and is the least susceptible to success at the very low end of the market by companies such as Wal-Mart or Dollar General Corp. (NYSE: DG). No position is more than 1.85% of the ETF.
I’m recommending the XRT Jan 2011 35 Puts under $2.15. These options spiked Wednesday when the market sold off, but you shouldn’t chase them. Wait for the market to stabilize a bit and use tight limit orders.
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