While the 2019 stock market is getting off to a good start, equities are still reeling from headlines. We are still in a tariff war with China and Europe and deadlines are looming. We also have to contend with the longest U.S. government shutdown in history.
Yet the retail sector SPDR S&P Retail ETF (NYSEARCA:XRT) is up 6% year-to-date. But they have a big hole from which to dig out. Target (NYSE:TGT) for example is down 10% in 12 months so it has plenty of room to run if markets are able to maintain the rally. The December crash presents an opportunity for an extended run. Sentiment may have been too grim.
Investors on Wall Street feel better about stocks. Yesterday for example, Walmart (NYSE:WMT) got an upgrade from Morgan Stanley and the stock spiked over 1% in a tough tape. They raised the price target to $110 per share. This is a gutsy move and I respect it. But I cannot chase WMT from these bloated levels. Its trailing 12 month price-to-earnings ratio is 56, which is far too rich for my taste.
Compare that to TGT, which was flat yesterday. This is a company that has the respect of experts on Wall Street. Consensus is that management is competent and that they are on track to succeed as a big box retailer in the new shopping world that Amazon (NASDAQ:AMZN) created in the last ten years.
While Walmart is hogging the headlines, Target stock makes for a better bet from here. The rally off the December crash is not done.
So today I suggest that the better trade off the Morgan Stanley upgrade is to buy Target stock. If WMT is going to be higher, then so is Target and it has a lot of catching up to make. At least I know that by buying TGT stock here, I would be buying more value than froth. Its P/E is three times cheaper than that of WMT and twice as cheap as Costco (NASDAQ:COST). So if things continue to be difficult for the indices, then I should have less downside exposure owning TGT than WMT.
Moreover, there are technical reasons to own TGT into the first quarter. My macro-economic thesis is that these negative headlines will abate in the next few months so stocks will rise. Target will have a chance to trigger a breakout trade off the $72 per share neckline. This is a zone that spans +/- $1 and it could easily fill the gap to $78 per share.
For the last half of 2018 sellers were in complete control. They made the sell-the-rip meme take hold so rallies didn’t last long. This is no longer true in 2019. Every effort to fade the rallies failed. Even on Wednesday and in the face of a slew of negative political headlines, the S&P 500 shrugged off the dip and closed strong. The CBOE Volatility Index (INDEXCBOE:VIX) closed down 6% in comparison.
Furthermore, and even if we retest the February lows, it would still be inside the acceptable range and another buying opportunity. This means I can buy Target stock now and sit on it for a few months for the upside reward knowing that it could fade a little for the next two weeks.
TGT Stock Has Support
The recent price action has a point of control around $68 per share. Those tend to be supportive on the way down. So I am confident owning the shares knowing that if it dips, there will be congestion below that translates into support. The December crash was a complete overshoot and is not in my forecast now. Anything below $66 is extreme and won’t last.
The experts on Wall Street agree, but the analysts are shy about upgrading it even though it’s trading below their average price range. So this leaves decent odds to positive headlines on that front.
Meanwhile, it will be hard to ignore the negative rhetoric. The media tends to inflame the potential pitfalls because drama sells. It is important to keep it simple and trade the levels at hand. Once I choose a thesis, I trade the price action in the charts. This way I eliminate the sentiment element.
I bet we would all be better traders if we completely ignore the news.
Click here for a bonus video on how to create income from nothing using FedEx (NYSE:FDX) stock as an example. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
