This column was originally published on RealMoney on Nov. 7 at 12:00 p.m. EST. It's being republished as a bonus for TheStreet.com readers.
America's retailers reported uninspiring October sales last week, to say the least.
The weak numbers cut across the board, with department stores, specialty shops and bargain basement chains all missing their monthly targets by wide margins.
The results have added to growing speculation that the economy is headed for a slowdown in 2007.
The holiday sales season also began in earnest last week with a volley of ads delivered through the airwaves, Internet and print media.
This barrage of sales pitches will continue unabated into the last week of the year.
Most shops have already cleared out the fall inventory to free up valuable floor space for seasonal items.
This backward creep of holiday ads has become a two-edged sword for American retailers.
First, early promotions translate into early discounts that undermine profitability.
Second, although retailers ring in the strongest sales of the year in November and December, they can lose major income by removing fall inventory too early in the quarter.
A case in point:
Christopher & Banks
last week significantly cut its guidance for the fourth quarter.
It cited the premature removal of fall merchandise and early display of holiday items as the primary reasons for the shortfall. Talk about shooting yourself in the foot.
Last month, I noted that the
Retail HOLDRs Trust
considerable resistance at $100. Notice how this key level has come into play once again, with a late October reversal beginning at $101.49. Last week's poor sales data triggered further selling pressure in the trust, setting up a key test at the 200-day moving average.
The instrument needs to hold this price level or risk a trip all the way down to range-support near $88. It's a serious bearish sign for this retail sector proxy to take a nose dive at the same time that end-of-year merchandise is hitting the floors. It suggests the entire 2006 holiday sales season may be at risk.
The broad sector may follow
, the 400-pound gorilla of retail sales. The stock bounced strongly when the
started to break out and hit a 20-month high in late October. However, that was a deceptive number because it still hasn't overcome strong resistance at $51 marked out between 2003 and 2005.
Last week's wide-range reversal suggests that Wal-Mart's three-month rally is over. The selloff at resistance warns that it could retest its 2006 low near $42 in the next one to three months. This is bad news for the entire retail sector as it heads into the holidays.
Is Wal-Mart a harbinger for the next recession? There are a number of analysts who believe this stock reflects the will of consumers worldwide to open up their wallets and spend discretionary capital. However, it's best to wait for broader evidence of a slowdown before assuming this issue is telling the tale of harder times to come.
October same-store sales data revealed a select group of retail winners as well. Typically the outperformance list featured the same stocks that have already led the sector for months or years. These bull-market names include
American Eagle Outfitters
Momentum traders can play these stocks into the holiday season and do relatively well, but at this point I'm more interested in finding issues that have high expectations and low performance heading into the last two months of the year. Aggressive short sales on these issues could do quite well, as long as tight risk parameters are maintained.
chart offers an interesting companion play to the Wal-Mart downturn. This stock rallied to resistance at its 2005 high in early October, hovered there for four weeks and then sold off after October sales missed the target. The bearish outside day printed Friday sets the stage for a larger-scale decline.
The stock finished the week sitting right at the 50-day exponential moving average. This is the key level to watch to make a short-sale entry. A breakdown through this support level should trigger a slide to support between $50 and $52. Traders can take profits at this price level or right after the holidays, whichever comes first.
Other retail stocks with promising short-sale patterns after last week's data barrage include
Ann Taylor Stores
At the time of publication, Farley held none of the stocks mentioned, although holdings can change at any time.
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. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;
to send him an email.
click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.
TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.