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How to make money off of the retail rout

  • Retail stocks slipped on Wednesday.
  • Some strategists forecast further downside for the group, but there are ways to make money off of the rout.

Retail stocks are slipping further in Wednesday trading, after sliding nearly 2 percent on Tuesday, and some strategists are forecasting yet more losses for the beaten-down group.

On Wednesday Advance Auto Parts, AutoZone and TripAdvisor, among other retail names, hit new lows as e-commerce giant Amazon reached an all-time high. Tiffany's and Signet Jewelers, two luxury names in the group, skidded on Wednesday, too.

The XRT, meanwhile, has fallen by more than 1 percent in more than 1 out of every 5 sessions this year.

Stacey Gilbert, head of derivatives strategy at Susquehanna, said that based on options market activity, "undoubtedly, sentiment in retail is still negative."

To capitalize on the broad moves lower in retail, Gilbert said investors ought to avoid buying a whole basket of stocks but select names they like, which are perhaps oversold.

One company in the space Gilbert likes right now is Foot Locker, noting that Susquehanna's footwear analyst, Sam Poser, marks the name a buy and believes its recent sell-off on weak earnings was overdone. Gilbert would recommend owning July 60-strike calls in the company to have the "embedded protection" that options offer; that is, they fix their owner's downside, while upside remains unlimited.

"This I think is the best way to play retail; buy the names you like. Don't buy the basket, because all the names have different issues," Gilbert said Tuesday on CNBC's "Power Lunch." "Find the names you like and position that way."

On a long-term basis, retail stocks could be facing further trouble, said Miller Tabak equity strategist Matt Maley.

"There can be some opportunities on a trading basis here and there, but I'm more concerned that on a long-term basis, the group has some big trouble," he said Tuesday on "Power Lunch."

"The key to note, of course, is that just because the retailers are going down, it's no longer a good measure of consumer sentiment or consumer spending anymore," Maley added.

In fact, consumer discretionary stocks and retail stocks used to trade in tandem, but they have recently diverged. The XLY, a popular ETF that tracks consumer discretionary stocks, is up nearly 10 percent year to date, while the XRT has fallen by 8 percent.

"So if you want to get the pulse of the consumer, keep track of the XLY," he said.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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