Trading the Retail Sector on Cyber Monday

The chatter amongst retail analysts is that we are off to a somewhat decent holiday season following Black Friday’s activity.  The National Retail Federation’s survey found that 195 million shoppers were online and in stores over the weekend, which is an increase over the 172 million that visited last year.

While the traffic seems to be higher, spending (at least estimates of) is down from $373 per person to $343 per person.  (I have no idea how  accurate this data is as it is a selective, verbal and written survey offered to a relatively small number of consumers).

About the Survey

The survey, conducted Nov. 26-28, 2009 by BIGresearch for NRF, polled 4,985 consumers and has a margin of error of plus or minus 1.4%. BIGresearch is a consumer market intelligence firm that provides unique consumer insights that are gathered online utilizing very large sample sizes.

Remember this is just a small first glance, which may or may not be the case for the industry as whole.  One might also expect large deviations from these predictions for some of the smaller boutique retailers.

Let us also not forget that many of these retailers, both online but more so in the brick-and-mortar space, are much leaner and meaner than they were a year ago. Most of the positive earnings we saw over the past two quarters have been due to major cost cutting, which have improved margins and profitability.  If we see topline growth in these retailers, the net picture should look even rosier, with the cost cutting we have seen over the past year.

Here are the full numbers from the national Retail Survey Federation’s findings.

Whether you agree or disagree with the findings, one of my favorite retail ET’s is the Merrill Lynch Retail HOLDRs product (RTH).  The product will give you exposure to 18 companies and its largest holdings are Wal-Mart Stores (WMT), Amazon.com (AMZN), Home Depot (HD), and Target (TGT).

This diverse product blend, in my opinion, offers a balanced portfolio in some of the best companies in that sector, not to mention that I believe most shoppers this year will be focused on the discounters as opposed to the boutique and high-end firms.

Always remember to pay close attention to the history of RTH’s movement, as it is up 5% during the past month and has risen more than 25% in 2009.  With that said, I think we will see some upside growth, albeit moderate, in the RTH.  I would look at trading at-the-money buy-writes or short puts, closely dated.

Here are the holdings and weightings for the RTH: