The last retail trade we recommended was on Walmart (NYSE:WMT), but we actually recommended it because Target (NYSE:TGT) performed so well at its last earnings report. At the time, TGT options were underpriced, and WMT, which had a strong, if poorly timed, earnings report, was offering better premium.
We want to be careful this week while investors wait for important economic data — some of which will come from the central bank meetings. The looming deadline for more tariffs on Chinese goods on Dec. 15 is another risk factor investors are watching closely.
However, in light of Friday’s surprisingly positive labor report, we also don’t want to miss out on the momentum in retail stocks.
WMT looks like it may get stuck in a consolidation, and while that’s not a worst-case scenario for put sellers, we don’t think it’s the best way to maintain our exposure to retail. We should be able to accelerate our returns with a new put write on TGT, which is already moving nicely.
Betting on a Short-Term Trade Resolution
Unlike some of its peers, TGT’s positive earnings report has not resulted in a whipsaw or retracement, which gives the stock an edge for traders looking to earn some additional premium.
Although the events this week risk creating some extra volatility, we feel that investing in favor of a short-term resolution to the U.S.-China trade tariff issue is a smart move.
Positive trade news should help TGT because it will lower the expected costs of imports in the short term. With the holiday shopping season looking good already, this creates an opportunity for more profits than we would expect from manufacturing or financial stocks, though the financial sector is one we like.
As we mentioned in the Bank of America (NYSE:BAC) trade yesterday, the strong jobs report from last Friday is a good sign for the strength of the consumer. We can safely say more people are employed, and people are making more money. That should translate to more spending.
Using the Bottom of the Gap as a Strike
From a technical perspective, TGT is in a solid uptrend. The stock opened a gap with a bottom at $122 after earnings. It has since retested $122 as support, and the level held, which confirms there is a high likelihood of another breakout to the upside.
Daily Chart of Target Corporation (TGT) — Chart Source: TradingView
We were able to take profits on the WMT December 20th $119 put write we recommended, but we aren’t convinced retail stocks like TGT and WMT are done rising in the short term. WMT still seems stuck in the $118-$120 range, but TGT has a great strike price built in at $122.
We don’t want to look too far into the future because trade is still a major uncertainty hanging over retail stocks, but TGT’s strong fundamental performance and technical picture make it a great way to maintain exposure to the sector through early January.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.