Retail Sales Down – Deflationary Down Spiral

macys bad earningsThe market was surprised today with a negative move in retail sales for the month of April. Most analysts (even myself, slightly) were expecting at least the same as March’s numbers, probably even stronger. However, retail sales showed a loss of 0.4% for the month, 0.5% without autos. Such news supports my theory and thoughts on us facing more harsh times in the near future. The fact is that despite the massive discounts and liquidations that have been occurred the past few months and retail sales are continuing to weaken shows that consumers are still not spending and liquidity problems still remain. Remember, these numbers track the total receipts of retail stores, not actual net income. With the slash to margins, such news should tell us that many retailer’s bottom line is getting killed. Like I’ve said before, as we keep treading in this swamp of low liquidity, one by one more and more retailers and businesses will begin to go under, which will bring us to the next chapter in this crisis: The Bankruptcy Stage (which usually leads directly into the unemployment stage).

Today’s downward movement acts as a pretty big technical move for bears, as we have not seen strong, consecutive selling for quite some time. Our current position in the market is very vulnerable to technical reversals. Today, keeping the S&P under 890 was a very strong technical and should indicate a near retracement down to the 750 levels. Here is another Free S&P Technical Analysis video, which discusses this critical point in more detail. Sure, we are still vulnerable to upswing days and profit taking, but I am becoming more and more convinced that this selling should continue much further. We will learn a lot from the PPI and CPI report which comes out tomorrow and Friday.

Last month, we received a horrible -1.2% MONTHLY drop in PPI (Producer Price Index or wholesale goods). This data was very significant, as it shows our deflationary state worsening more and more (you can get solid economic data from Morningstar, which they have a free trial: Morningstar Premium Membership - 14-day free trial). Tomorrow, they are expecting the results to remain flat from the previous months. Such a result would not refute the possibility or existence of a deflationary down spiral, as like I’ve said before, we can expect slight month to month swings. However, if indeed we see a worse number reported, I would see this as a big red flag to the markets, and I will most definitely be gearing up and preparing, for what I believe, will be a rather aggressive down leg. CPI will also be factored in, especially on a year over year basis. So I will make sure to be keeping everyone updated on my moves, especially on the podcasts (subscribe here).

Ignorant bulls (not that all bulls are ignorant, but some are being pretty stubborn these days) are already throwing this small sell off aside saying that we all expected a pull back and there is no need to worry. As expecting the rally may be the case, there is still a big debate of how severe the pullback will be. I admit, there isn’t much to cheer about quite yet as a bear, but I would be very careful moving forward as a bull for the next couple of months, because the clouds are there for a perfect storm to form. It all depends on which way the wind blows. To say this is only “profit taking” and an opportunity for investors to buy into the bull market at lower levels is risky and down right foolish. Unfortunately, if we do push lower, many will be caught chasing lost profits. This is why I always preach patient and careful moves.

There was more green in my portfolio for me to enjoy as a result from today’s trading. FAZ closed up 13.8%, which weathered well for my FAS Put options as well as my actual FAZ share holdings. Also, SRS closed up 13.8% as more and more worries for commercial real estate are coming to light. My Put options on PRU are also performing very well, as they continue to struggle. I will have to look at taking some off the table at some point, but for now, I cannot complain. I hope some of you were able to short my last week’s Market Trend Feature which was LVS. Since then, the stock has taken over a 40% beating.

Macy’s came out with worse than expected numbers, which took a bite out of their stock. Last month I gave a list of retailers that should especially struggle in this economic environment and Macy’s was at the top of my list. I expect department stores to continue to take a back seat for the next several months as many people are going back to Wal-Mart and other cheaper retailers. Wal-Mart does release earnings tomorrow, which could definitely be better than expected as they are considered a “discount retailer”, and more people are shopping cheap. From a macro economic standpoint, you almost have to take that as bad news, as most likely, people are replacing their other retailers by just choosing to go to Wal-Mart. I don’t expect their results to be too influential, but worth noting.

So we’ll see if we can finally see a hat trick in selling tomorrow. Volume is slowly getting higher and VIX levels are climbing, which both act as very good indicators for downward momentum. We are sure to see continual bank problems as well as more problems hitting the private sector. Be alert and careful, Happy Trading.


  1. Nash Says:

    As bearish as it was today, the volume was light. Looks like the drop was just a result of no buying, and most are just holding. With ignorant retails buying into the dips, I believe we may get a some support, or even minor ups. If that's the case, I would most certainly scoop up more FAZ and SRS.

  2. Anonymous Says:

    Which is a good ETF to short retail?

  3. Boyd Says:

    I bought some more for my IRA. If it goes further down, I will be happier since I can add more to my IRA. Then I will retire in 2010-2011. I also shorted FAZ and SRS for the first round as with their time decay, I will eventually become rich. Off course, I have lots of cash in my account. You may be calling me a stubborn bull, but I am wiser than you guys as I look for the long term, and I am not putting all my capital. A big short squeeze is underway for tomorrow sparking with WMT and better than expected data.

    Good luck to all.

  4. Finance Fanatic Says:

    Anon, there are not many bear etfs out there, but there are plenty of long ones to short. I personally like XRT and RTH. However, beware of RTH, as Wal-Mart is a big part of that fund.

    Boyd, Good luck on your strategy. When I do feel it's safe to go long, I too will take advantage of run back up. Just remember, during the great depression, the Dow did not reach their original highs until the 1950's, over 20 years.

  5. Unknown Says:

    Obama officials to expand housing aid

    FF, what do you think the reaction to this will be? Bailing out loaners who have bad credit sounds like a "great" plan. HA! What's the government backing for this? more tax payer money?

  6. Boyd Says:

    Thanks FF, I am not expecting the DOW to go to 2008 highs, but looking at the big picture, there are many stocks on sale with a good outlook. Who cares about the index if your stock doubles next year?

    I am thinking of neutral trading using box spreads or even bearish call spreads in future. They make a lot more sense than buying into decaying short ETFs + you don't have to sweat every tick.

    Looks like this guy is doing great trading options: