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Why You Should Target a Short Position With Target Stock

Rich valuations and overbought technicals should temper any further rally in TGT stock

Target (NYSE:TGT) stock has certainly been a standout performer so far in 2019. Specifically, Target stock is up nearly 70% so far this year, far outpacing the solid 14% gain for the S&P 500. It is even more impressive given the difficulty retail stocks have had recently.

Why You Should Target a Short Position With Target Stock
Source: Robert Gregory Griffeth /

The rally is getting a little too red hot though. And an overvalued and overbought Target stock is due for a pullback.

There’s no question that the earnings reports for TGT in 2019 have been impressive. March was basically in line, while May beat by 7% and August beat by 11.5%. The question isn’t whether TGT stock should be higher in 2019 — it absolutely should.

The real question is whether it should be up almost 70% given that earnings beat by only 18.5%. I think valuations will begin to trump momentum now that the rally has cooled somewhat.

What to Expect From Target Stock Now

What to Expect From Target Stock Now

Target stock is currently trading at its highest price-to-earnings multiple over the past three years after breaking through the 18 level. The previous two instances when valuations reached these extremes marked significant intermediate-term tops in Target stock.

Target Stock Valuation

Similar fundamental metrics, such as price-to-sales, price-to-book and price-to-cash flow, are also well above the 5-year averages. Any further multiple expansion from here will likely be difficult and should provide a ceiling for additional price appreciation.

However, TGT stock is looking a little tired and toppy from a technical take.

The 5-day RSI is now back above 70 and Bollinger Band Percent B is over 100, which is another sign that Target stock is getting overbought.

Target stock is trading at a large premium to the 50-day moving average. This has been a precursor to a pullback back to that average in the past. The MACD is still languishing, though, and failed to confirm the move higher. Shares are struggling to break out to new highs as well.

A look at a monthly Target stock chart (above) paints an even clearer picture of overexuberance.

All the indicators that were overdone on a shorter-term basis are even more overdone on a longer-term basis. The RSI, MACD and Bollinger Percent B are all at 20-year highs. Target stock is trading at by far the largest premium to the 50-month moving average ever. The chart clearly shows that this type of price action can’t last.

TGT is undoubtedly primed for a pullback if history is any guide.

How to Trade TGT Stock Today

Stock traders should look to short Target stock on any further strength. A move back to the post earnings gap and the 50-day moving average near $100 is the price target. A meaningful breakout to new all-time highs would be a viable stop out.

Option players should note that implied volatility for Target options is at only the 16th percentile. This is a sign of complacency and a contrarian bearish indicator. It also means option prices are comparatively cheap, favoring long volatility strategies when constructing trades. To position for a pullback in Target stock, a bearish put calendar spread trade makes probabilistic sense.

Buying the Dec $105 puts and selling the Nov $105 puts would cost about $2.20 per spread. Maximum risk is the premium paid of $220 for each spread. Ideally TGT stock closes near $105 at November expiration. The trade structure also allows additional selling of weekly options against the December position once the short November options expire to further reduce the cost.

Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to


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