It's Time (Again) to Shop Retail

"Attention, RealMoney shoppers: There's a blue light special going on right now in the retail sector. Please hurry because supplies are limited."

Flash back to June and July, when I theorized that year-end holiday speculation actually begins during the hot summer months. In those columns, I discussed how the market's discounting mechanism shifts valuation about six to nine months into the future. Right on schedule, retail stocks awoke from the dead and began a fabulous run that charged into the Labor Day holiday.

Flash forward to early September, when I noted that holiday hopefuls had already ramped up to inflated levels and could be risky to buy. Just about that time, analysts proclaimed the end of the retail rally, advising their constituents to take the money and run. Right afterward, I told folks to be patient because the best was yet to come.

Finally, jump to last week when America's storefronts reported blowout September sales figures. No doubt they were aided by easy comparisons with a prior year undermined by the first anniversary of the Sept. 11 attacks. But they still pulverized consensus expectations that already took the anniversary into account.

Take a look at some of the impressive monthly same-store sales figures reported last Thursday.

What does all of this mean? We're going to see a powerful round of retail upgrades in the days ahead. These will affect both individual stocks and analyst expectations for total holiday sales going into the end of the year. This capitulation should trigger a strong rally that lasts into the Monday after Thanksgiving, when retailers report their first holiday sales activity.

Frankly, I was surprised how few upgrades we saw last Thursday and Friday. The good news is that this opens up a buying opportunity for observant traders and investors. Analysts are so paranoid about high valuations right now that it will take them a while to see the handwriting on the retail wall. No doubt Thursday's key reversal in the major averages made them sit on their hands a little longer than usual. But they will act soon.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At time of publication, Farley had no positions in equities mentioned in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to [e-mail]. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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