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Best Buy, BBY,a Compelling Short

|Includes:Best Buy Co. (BBY)

We believe it's a good time for a hedge on the short side, and that Best Buy is a very compelling candidate. We've been watching this stock and following the company and sector for some time now. Here's how we see the chart and our thinking on the situation. Click the chart to see a larger version.

The black lines show the obvious long-term trends in place, and the 200-day moving average (in blue) has clearly been an important line.

We suggest shorting Best Buy, BBY, at current levels or higher. It closed today at $25.02 We suggest covering the position for an effective loss of approximately 14% on closes above $28.50 which is slightly above the support/resistance line in red labelled "2".

Shorts must factor that Best Buy pays a dividend, which of course short sellers are on the hook for should we hold it through a dividend declaration. On average, that's $0.14 share quarterly. Next dividend declaration should be circa mid-late March. BBY's next earnings announcement is scheduled for March 26th.

The other support/resistance lines labelled "1" and "3" are other obvious technical levels of note. Those very skittish about risk in such a trade as we're proposing here may wish to consider covering above line "3" on any close above $26.33 which would represent an effective loss of approximately 5%

In the bottom pane we see a long-term downtrend in RSI (Relative Strength Indicator) peaks, and we see that the RSI has very recently peaked and apparently turned down. We've drawn a downward-sloping red line to illustrate this, labelled "5".

In the MACD (Moving Average Convergence & Divergence) pane we see that the current levels correspond to long-term peaks and a possible downturn beginning. See label "4".

The business itself, as well as the overall sector is weak. In general, people have spent and borrowed far more than they can afford and have all the electronic gadgets and large televisions they need. For several quarters now, Best Buy has been disappointing vs. analyst estimates and contracting. We believe that'll continue.

On a relative basis, BBY is a disaster. Since early July it is down 22% while the DJIA is slightly higher and gold is about 15% higher over the same period. Since January of 2008 the DJIA is essentially flat, gold is up 96% and Best Buy is down 46% We believe this relative failure will continue going forward.

Lastly, general equities markets are up signficantly since early October and as we've outlined several times recently there is material overhead resistance. By contrast, Best Buy is relatively flat since then and if/when markets falter we think BBY will drop at least roughly $2 to its December lows and over time we'd frankly not be at all surprised to see the stock below $10.

Disclosure: I am short BBY.

Stocks: BBY