Are Hopes Too High for Target (TGT)?

In last week's edition of Trading Tools, semiconductor firm MKS Instruments (MKSI - Snapshot Report) was examined, as it appeared on the Zacks Put/Call Ratio Greater than 1.0 screener. This week, we will be taking a look at Target (TGT - Snapshot Report), as it showed up on the Zacks Unusually High Call Volume filter.

The Unusually Heavy Call Volume Filter

The Unusually Heavy Call Volume filter looks for stocks that saw call volume trade on the previous day that was significantly above the stock's average daily call trading volume. Why is this important? Well, a stock that is seeing heavy call trading is a good indication that expectations for the security to rally are extremely high. This activity could also be an indication that the company is expected to report earnings or some other news relatively soon.

From a contrarian perspective, we are looking for a stock that has high investor expectations (such as heavy call trading) and weak technical performance. This combination of technical weakness and high expectations leaves the stock vulnerable to a sharp downside move should the equity fail to live up to expectations, forcing investors to close out their long positions.

A Touch of News

On Thursday, Target (TGT - Snapshot Report) reported that April same-store sales rose 3.1%, missing the Street estimate. The firm said that consumers shopped for necessities such as food, and skipped higher-priced items such as jewelry. In addition, results were weakest where the housing slump hit hardest, including Florida, Arizona, Nevada and parts of California. Total sales for the month climbed by 9% to $4.25 billion. Year-to-date, same-store sales fell 0.7% while total sales rose 5% to $14.3 billion.

On Tuesday, May 6, the firm revealed that it sold 47% of its $8.2 billion credit card portfolio to J.P. Morgan Chase for $3.6 billion. Under terms of the sale, the portfolio's performance must remain "sufficiently strong." And if "substantial unanticipated portfolio deterioration" occurs, JPM would gain the right to direct Target's credit card team to put in place alternative underwriting and risk management practices until sufficient improvement is seen.

In addition, TGT boosted its estimate for net write-offs on the credit card portfolio to 7% to 8% of receivables for the year, up from just more than 7%, and said it expects delinquencies as a percentage of receivables of 4%.

Technically Speaking...

Shares of TGT have dropped below a trendline connecting a series of the stock's higher lows going back to its mid-March lows. This break down could signal that the shares are entering a short-term downtrend.

From a longer-term perspective, we find that the security is faced with staunch resistance at its declining 10-month moving average near the 56 level. This trendline has capped the shares since October 2007 and could easily cap any rally attempts during the long term.

Call Trading Dominates

Calls have been the option of choice among investors. The Zacks Unusually Heavy Call Volume filter revealed that a total of 71,647 calls traded on TGT on Thursday. This compares to the stock's average daily trading volume of 21,549 contracts. In other words, call trading was 3.3 times as heavy.

The Schaeffer's put/call open interest ratio for TGT dropped sharply overnight, falling from 1.01 to its current perch of 0.94. This decline in the ratio indicates that call open interest grew at a faster pace than put open interest among near-term options. This combination of weakening technicals against the stock's sentiment backdrop of growing optimism has bearish implications from a contrarian perspective. Should the shares fail to rally as expected, the stock could be hit with a significant wave of selling pressure as these optimism unload their long positions.