Chris Johnson

Don't Buy Into the Retail Hype

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But if you're thinking there was no Santa rally this year because the big, jolly guy was hitting the post-holiday sales, well, my guess is that St. Nick is currently in Witness Protection, because he's not on Wall Street, and he's definitely not at the malls, either.

Santa Was Grateful for the Lighter Sleigh Load

Looks like the retailers got coal this year even if they weren't as naughty as Bernie Madoff:

• It's no secret that fewer shoppers are walking through most stores' doors. There may be exceptions, such as Wal-Mart (WMT) or Dollar Tree (DLTR), but most stores aren't seeing the bodies they need. I remember past holidays when it took 10-15 minutes to get off the exit ramp at a nearby mall. Even during the biggest sale days, I flew past the mall like it was midweek in March.
• The traffic that is coming is being driven by huge discounts that you normally see after Christmas. If shoppers don't see sale signs in the front window advertising at least 50%-60% off, they move on. They've been conditioned to expect such massive discounts. For example, Lowe's (LOW) offered holiday decorations, including $300 fake trees, at 50% off three weeks before Christmas. That's a sign all right, and not a good one.
• Bitter cold and heavy snows in the northeast, ice across the Midwest, and even snow in Las Vegas has kept traffic down throughout the most critical final shopping week. So, online sales must be up, right? Nope. Internet shopping is down as well.
• Gift card sales are down. Stores used to count on a boost from gift card redemptions early in the new year (revenue isn't counted until the card is actually used for merchandise). But that isn't the case this year. Gift card sales are down, meaning stores have even less to look forward to.

Find the Best Retail Bargains in the Options Market

Sentiment toward the retail sector is mostly negative, except for options data. There's no question that put open interest (146,200 contracts) overwhelms call open interest (11,300 contracts) in the January series.

But trading volume has been another story.

Recent daily put/call volume ratios have hovered in the lowest 5% of all readings of the past year. This tells us that someone is betting on a rally. There's a term for that -- "misplaced optimism."

The good news is that this misplaced optimism is creating some killer deals in the options markets. You might not find the same bargain as at the jewelry counter of your local Sears (SHLD), but if these artificially floating retail stocks drop hard, then put premiums will get expensive and this sale will disappear.

So, if you're going to buy, now is the time. Skip the malls, because the best bargains you pick up may just be in the options markets!

Chris Johnson is the co-editor of the FREE Earnings Edge trading service designed to help you make options profits around corporate earnings and other market events. For more information about Chris, read his bio here.