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Retail Sector: Will "Short" Players Get Squeezed On Thursday?

"Massive short squeeze run?" JP Morgan's Charles Grom raises the question of whether we'll see a short squeeze run of retail shares when same store sales are released this Thursday much like we saw last month. If you remember, June's same store sales were not strong by any means rather they were more or less on plan for what is traditionally a weak summer sales season (buyers are on the beach not the in the malls.)

Still these comps weren't as abysmal as Wall Street expected. Since expectations were low, the upside surprise helped shares gain +3% v. S&P 500's +1.9% gain. Grom says that this Thursday we may once again see a short squeeze run up in retail shares. Why? Well take a look at the volume of investors betting that retail shares are headed downward. Could these guys get stuck short covering on Thursday?

Right here on this blog last week I wrote about short interest building among retail names. The shorts are building even more this Monday! Take a look at the department stores: Dillards is at 8.9%, Saks 10.6%, J.C. Penney 4.8%, Kohl's 3.3%, Macy's 2.7%. Electronics retailers Best Buy is at 9.7% short interest and Circuit City is at 8.1%. Discount retailer Target is still at 2.65% but Wal-Mart is one of the few discounters that the shorts seem not to be piling on top of: just at .89% short interest.

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Reader Juan Ochoa wrote in to ask me to compare these shorts to other sectors in order to have a better understanding of just what these numbers really mean. Good point and something that I should have done originally. Here ya go: Troubled broker Bear Stearns is at 8% short interest--less than Saks, Dillards, Best Buy and Circuit City. Home goods retailers Lowe's and Home Depot are both in the 2+% short range,similar to Goldman Sachs (2.3%) and Lehman Brothers (2.6%) Hmmm...

Many funds are using retail to hedge out exposure to risk and they're betting that the consumer will slow down spending. The market is also shorting takeout targets on the idea that LBOs in this category may slow. (Although news over the weekend of the bidding war over Jones Apparel's Barney division by Fast Retailing and Istithmar certainly wouldn't make you think that LBOs are done and over. Of course, the $950M price may be worth it to Fast Retailing which has been pushing to get a foothold in the Manhattan market. Perhaps Barney's will not just be a crown brand name jewel for the company but also more profitable than its Uniqlo division.)

I digress. My point is only that what may happen this Thursday could confound anyone trying to play the retail sector right now. July's same store sales could cause a short squeeze in the market if the numbers are even slightly better than expected. According to Weather Trends Internationa, July could actually be the "best month since March" due to cooler weaither and a (relative) 6.6% drop in gas prices this year.

Questions? Comments? retaildetail@cnbc.com

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