As The Economy Stagnates – Short Zale (ZLC)

The market has fallen from great heights since last October. The S&P 500 was trading over 1500 and the Dow broke above 14,000 heading towards 15,000 points. And then it happened. The deluge of bad news started last summer. Despite heroic governmental attempts to stabilize the market, it fell. Rally attempt after rally attempt faltered and now we see another potential failed rally. Will we break the October lows? Time will tell. But one thing is certain…

Bearishness Is Now Mainstream

As Americans watch their neighbors getting laid off, we’re scaling back. Boats are being sold. Cars are getting downsized, even as gas prices fall. Financial magazines are feeding the frenzy by printing front pages like: What’s Next? (Forbes), Is GE Okay? (Fortune), 12 Moves to Make in a Tough Economy? (Smart Money), and 21 Good Things To Do in a Bad Market (Money). Consumer confidence cycles downward as bad news begets bad feelings and that begets bad news all over again.

In times like these, the worst thing you can buy is Consumer Discretionary. Companies that depend on extraneous consumer spending are hit worst when the bad news cycle dominates the headlines. Discretionary stocks like Home Depot (HD), Starbucks (SBUX), and Radio Shack (RSH) are feeling the pain of this market. The SPDR Select Sector Consumer Discretionary ETF (XLY) that tracks this sector is down over -50% since last June.

Jewelry Falling On Hard Times

One of the weakest areas of Consumer Discretionary is jewelry. Diamonds, necklaces, and other personal ornamentations are not exactly in vogue. With falling salaries, rising unemployment, and downsized lifestyles, the normally-obligatory anniversary bracelet is now considered too ostentatious. Frankly, many shoppers are more interested in buying groceries, than wearing a new gem-studded brooch.

As harsh economic reality settles across the land, those who market jewelry continue to suffer. One such company, Zale Corporation (ZLC), has been especially hit by the recent downturn. Fighting against a trend of falling sales and slackened Christmas expectations in their industry, Zale faces an uphill battle. Even if the market rebounds, consumers are not likely to spend their expected increase in the near future. That means fewer sales for Zale.

Technical Considerations on Shorting ZLC

In September ZLC traded above $30. Today, it broke short-term support and closed at $12.70. Since ZLC also broke through long-term support at $12.81, we expect it to fall even further. Although we don’t usually discuss short ideas, this one was so compelling we thought you should consider it.

Shorting stocks is not for the faint of heart. Before pulling the trigger, you should understand the basics. Whereas stocks have a theoretically-unlimited ceiling, they can only fall to $0. This limits the profit potential of any short position. This also dramatically increases your potential losses. Moreover, you cannot sell-short in a retirement account like a 401K or Roth IRA. This restricts where you can place such a trade.

Finally, the long-term upward bias of the market is so strong, many investors shy away from short positions altogether. That’s why it’s important to consider your stops and profit targets before placing a short-sale. For that matter, you should do the same for long positions. If you’ve prepared and you’re still looking to profit from jewelry’s decline, then short ZLC.

All the best.