J.C. Penney Can Crush Shorts and Longs

NEW YORK (TheStreet) -- Consumers on the lookout for the best deals know J.C. Penney (JCP) is in the midst of a battle royale for survival against Wal-Mart (WMT), Target (TGT), Sears (SHLD), Kohl's (KSS) and Macy's (M), among others. Like gladiators, these champions of retail fight to the death. For investors and money managers, there's another important battle waging in retail -- this one regards analysts' opinions.

For J.C. Penney, it's the fight between analysts at Goldman Sachs (GS) and Citigroup (C).

Goldman's Take

Goldman Sachs all but said J.C. Penney is finished, and note holders should consider credit default swaps to protect against losses. A credit default swap is a form of bond insurance and has characteristics of a binary option, it pays the buyer in the event the underlying bonds default.

Credit default swaps don't help shareholders, however, bond holders have priority over shareholders during a liquidation. If bond holders have reason to worry, shareholders should be shaking in their boots.

Upon learning Goldman's opinion, shareholders acted as expected and exited J.C. Penney positions en masse. When the smoke cleared, the shares fell below the immensely influential $5 level, and the shareholder base shifted to new owners, based on the elevated volume.

Markets move day to day based on emotion, and after enough years of screen time, one gains a sense of when the market may bounce. In Profit From J.C. Penney's Panic Selling and in Real Money Pro, I offered a bull thesis, and that's paid off in spades. The selloff set up a dead-cat bounce, which in turn set short-sellers in motion.

The company has a short interest of almost half the float. That's a lot of smart money betting the shares remain overpriced relative to the company's prospects, but if something -- anything -- is able to renew interest in the stock, shorts run for cover, sending shares higher as they exit.

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