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Retail: Investors "Betting" Things Will Get Worse? (update)

AP

I think that things are going to get worse before they get better in the retail. I took a look at short interest in a few big retail names and was surprised to see just how many investors were betting AGAINST the stores that cater to the mass market consumer right now.

Some of these retail shares may look oversold by next week given that the back-to-school buying (BST) binge is around the corner and since stores will see a calendar shift benefit. As a result, the same store sales numbers that we get next Thursday may reflect that higher sales volume.

Still the market is already betting against consumer strength when it comes to spending at discounters, certain department stores, home goods and online retailers. Why do I say this? Take a look at short interest right now: at Wal-Mart 36m shares outstanding are short, at Target it is at 22.6M or 2.7% and at Sears 2.6% or 10M shares.

Department stores: Despite being a rumored takeover target Macy's is at 2.7% short interest. Kohl's is at 3 %, J.C. Penney is at 5%. Even high-end retailer Saks is seeing 10% of its shares being sold short.

Even though electronics retailers are expecting to get a sales boost over the next few months from back to school shopping, traders are betting against Best Buy which is at 9.7% short-interest. There may be more of a company-specific story here since competitor Circuit City is seeing a smaller 8.1% of its shares being sold short.

The home goods retailers have been weak for awhile: Home Depot's shorts are at 2.6%, Lowe's is at 2.5%.

What does this mean? The market could be hearing that consumers truly are getting more conservative with spending AND/OR the market is betting against continued price boosts due to takeovers (real and rumored) in the retail sector.

Bottom line: If we see even mildly stronger than expected same store sales numbers, you can bet that some of these shorts will get squeezed.

Interesting nugget: According to Weathertax, 24% of households surveyed have already begun their BST shopping. That's far ahead of last year.

Is the selling overdone? Expect to see PLENTY of volatility in this category over the next week. Email me with your thoughts.

UPDATE: All numbers above have been changed to reflect current amount.

Questions? Comments? retaildetail@cnbc.com