I'm asking myself whether it makes sense to be holding retail stocks (any retail stocks) over the next 12 weeks. In over 20 years of working in retail and following retail stocks, I've never had to ask this question before. Sure, there's always risk in retail over the holidays, because November/December sales make up a large portion of most retailers' yearly profit. But in past years, I was always able to assume that some retail companies would do well -- probably the ones that are best positioned going into the season -- and pick my holdings carefully.

This year is different
Nervous consumers have me on edge with this year's Christmas, though. The credit crisis has made the ability to finance a home, or borrow some of the equity in your home, pretty difficult. Energy prices are high, home prices are falling, and nearly every week now a major financial institution announces enormous losses on loan portfolios gone bad (with job cuts soon to follow). It's no wonder that October saw consumer sentiment fall to its lowest level in two years.

This is terrible timing within weeks of the holiday spending season -- Black Friday is next week. So consider the possibility that consumers will spend 5% less this holiday season on gift buying. Not only does that mean lower profits in the fourth quarter, it also means a lot of retailers could wake up in January carrying way too much inventory, which could take months of steep markdowns to clear. You can tell I'm in a gloomy mood.

The signs are there
Yesterday's rally in retail, led by Wal-Mart (NYSE:WMT) releasing better-than-expected results, displayed Wall Street's optimism that the holidays might not be as bad as expected. While it could indicate that Wal-Mart is finally starting to get its act together (after all, it was Wal-Mart that released earnings), I'm not convinced that it bodes well for the rest of the retail or world, or even the holidays.

Consider these other signs. Kohl's (NYSE:KSS) just released three consecutive months of negative comps. Bed Bath & Beyond (NASDAQ:BBBY) grew operating earnings a lukewarm 1% in its most recent quarter. Some department stores that have been strong recently, like J.C. Penney (NYSE:JCP) and Nordstrom (NYSE:JWN), reported negative comp sales in October. Only Target (NYSE:TGT) and Costco (NASDAQ:COST) seem (relatively) impervious to recent down retail trends.

Consider the "pot odds"
I hesitate to compare investing to poker, but I see a compelling case in this instance. A smart Texas Hold 'Em poker player estimates the odds of winning a hand with the amount of money needed to stay in the hand. If the poker player has a 40% chance of winning the hand, and only needs to shove in 20% of the current pot size, the bet is likely to be a winner over the long run.

The "pot odds" right now in retail don't look compelling. This is especially hard for me to say after suggesting to Foolish readers just a few weeks ago that a few retail stocks had been beaten down to an attractive level. While this may still hold true, the poor outlook for the holidays could push these companies down even further.

A better strategy
I can't help thinking retail is in for a disappointing holiday season. Every news source is publishing concerns about Christmas, and even Ben Bernanke said he sees a tough holiday season ahead. With many retailers already priced at low valuations, I think it's best to park your portfolio on the sidelines and wait and see who gets clobbered. Then, in January, you can swoop in and pick up shares of strong retailers at a holiday discount. Kind of like buying Christmas lights the last week of December. Not many people do it, but you're getting the same light bulbs and the price is much more appealing.

There are plenty of strong, well managed retailers who will be around for the long haul; you can find a bunch of them in The Motley Fool newsletters like Stock Advisor and Motley Fool Hidden Gems. I'm not suggesting we give up on the sector forever, but I do think we'll see a slower fourth quarter, which will effectively send stock prices down. We'll find out who the real bargains are in January and February. Until then ... happy shopping!

For more views on retail and the holidays, check out:

Costco is a Stock Advisor pick and Wal-Mart is an Inside Value recommendation. Either newsletter is already priced at a bargain -- they're free for 30 days.

Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, and owns shares of Wal-Mart and Costco, but none of the other companies mentioned in this article. The Fool has a very merry disclosure policy.