The Truth Hurts Stock Market Investors But Helps Option Traders

By: Adam_Lass

Turns out, the Axis of Error was "wrong" again about retail sales. Here's how to double your money, as the REAL story spills out.

For weeks now, I have been warning that the retail sector was nowhere near as healthy as the cheerleading squad was making it out to be, what with their endlessly optimistic guesstimates, reiterations of stale numbers, and after-the-fact stealth write-downs.

Well now we have the actual report out of the Commerce Department that everyone has been breathlessly waiting for.

But before I tell you what it said, let's review why we give a hoot about these dime-store shills and used-car salesmen in the first place.

Dime-Store Nation

Once upon a time, we made stuff here in America, all sorts of stuff – cars and hot dogs, rocking chairs and locomotives, dress shirts and bicycles. Now, odds are that the pie you are looking at in your local supermarket was baked in a Chinese factory out of Chilean apples.

We microscopically examine each little twitch in the "retail space" now because 70% of our economic activity comes from consumer spending. That's who we are and what we do now: we buy stuff.

Decoupling has become a sham: we buy so much stuff now that the rest of the world has pretty much banked on our consumer sector to drag their sorry behinds out of most of the recent global recessions.

Now the old adage "What's good for GM is good for the U.S." has been replaced by "what's good for Wal-Mart (WMT:NYSE) is just plain excellent for Li Fung Ltd. (Public, HKG:0494)" (possibly our largest single supplier of cheap Chinese goods). Everyone else can go pound sand with the back of a shovel.

The Real Deal

Prior to this latest Commerce report, the whole retail sector had been putting on some serious airs, rising almost 10% over the past three weeks or so on tales of grand expectations provided by the Washington/Wall Street Axis of Error.

So what did that report say? Well for starters, you can forget about the modest 0.2% drop the cheering squad predicted. Unfortunately, it turns out that our second falling month in a row delivered up a 0.5% drop to graft onto May's 1.1% loss. (And that's before several inevitable rounds of post facto "revisions" drop the figure even lower.)

Skim past the headlines, and the story gets even more gruesome: General merchandise store (think Wal-Mart here) sales actually gained 0.2% (albeit mostly with discounts that will most certainly dent their bottom lines).

But auto sales fell a whopping 2.3%, roughly par with last February's 2.5% drubbing. Seems that all Washington's various stimulus efforts merely robbed Peter to bribe Paul.

That is to say, they did not induce anyone to buy anything cars they weren't going to buy sometime in the near future anyway. Rather, all these billions in borrowed funds simply frontloaded a market that is quickly returning to its original moribund state.

And now that the truth is out, retail stocks as a whole have jammed on the breaks, putting in their first red candle in over a week.

(By the way, you should read what my fellow editor Justice Litle has to say about the retail industry. Sign up here to get his investment commentary.)

How to Capitalize on Another Big Loser

Also losing big in this latest reportage roundelay? Hardware stores, as in Home Depot (HD:NYSE), to the tune of some 1%, most probably a result of housing's continuing implosion.

Which would make this the ideal time to round out Tuesday's set of "Practical Proposals." Once again, I prefer not to reveal these specific contract designations, and at this point in a column usually just offer a generic "buy puts."

But the plaintive cry from stock investors looking for a way out of their predicament has melted my heart. So here is the exact contract I recently recommended to readers of my regular WOW column: Home Depot November 26 puts (HD1020W30).

Heck, I've even provided you with a hyperlink back to the CBOE, just in case your broker boggles at the idea of trading something other than the same old shares of Alcoa (AA:NYSE) and IBM (IBM:NYSE).

My educated guesstimate has HD shares dropping to $27.07 in the near term and possibly as low as $22.16 in the mid term. As I sit to write to you today, the put contracts I mentioned are trading for $1.31, and posting a delta of 0.2450. A drop to that last figure would see these contracts rise as high as $2.76.

In plain English, you would more than double your money off a 6% share price drop.

And that's practical enough for anyone.

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Source : http://www.taipanpublishinggroup.com/tpg/taipan-daily/taipan-daily-071510.html

By Adam Lass
http://www.taipanpublishinggroup.com/

Adam Lass is the Senior Editor of WaveStrength Options Weekly along with Bryan Bottarelli, and a regular contributor for free financial market e-letter Taipan Daily. Adam's fascination with technical analysis started in his early days as a wholesale purchasing manager, when successfully forecasting the public's future spending habits (using Treasury reports, stock trends, interest rates, even the Farmer's Almanac) meant the difference between prosperity and failure.

He has been called “one of the most brilliant charting minds in the country.” His deep insight into the economy and value analysis enables him to reliably guide readers through today's incredibly volatile market in WaveStrength Options Weekly.

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