An inside day for Target says another sell-off looms

Key Points

• Target shares surged following the Q3 release but are not fairly valued, with the risk of another sell-off. 
• A better-than-expected quarter is not good, with competitors growing and Target shrinking. 
• A sell-off is good news for value-minded income investors; Target's cash flow and capital returns are safe. 

Target Corporation NYSE: TGT had a much-better-than-expected third quarter (Q3), sending its shares to the highest level in months. The move looked strong at face value and closed near the session's highs, but the bearish signals are already emerging. 

Not only has Target's share price failed to cross a significant resistant point, but the initial surge was followed by an inside day and a doji candle, indicating trouble ahead. 

An inside day is a trading day in which the action is entirely within the previous day's action. This signal can occur at any time and often means little to a market except with other signals and/or at a potential market top or bottom. 

Because the price movement preceding the inside day was so vigorously bullish and the pattern is forming beneath a critical resistance point, it carries a high probability of being bearish because an inside day is a sign of indecision and potential for reversal. 

Target stock is also the most overbought it has been in a year, and it has significant overhead resistance due to the still-30% decline compared to last year's peak prices. 

Target had a better-than-expected quarter, not a good one

Target's move was driven by a better-than-expected quarter, not a good one. The company widened its margin and produced a significant bottom line beat, but it is not in good shape compared to its peers. 

Target outperformed on the bottom line and improved cash flow with inventory reduction, down about 14%, but its business is shrinking while its closest competitors grow. 

Walmart Inc. NYSE: WMT is growing at a 5% clip and producing solid margins, and it isn't leaning quite so hard into inventory management. Inventory at the world's largest retailer is down only 1.4% because it responded to shifting consumer habits quicker. 

The worst news for Target and another reason why shares are unlikely to rally further is market share losses. Target is losing share to Walmart and off-price retailers like TJX Companies NYSE: TJX and Kohl’s Corporation NYSE: KSS, sustaining solid sales in apparel and home goods, where Target and Walmart suffer. Target's business may stabilize and return to growth, but it will struggle with market share until consumer habits change. 

In the eyes of the cash-strapped consumer, Target is the more expensive upscale version of Walmart and no bargain compared to TJX Companies. 

The analysts support but don't lift the Target market

The analysts' activity is positive following the Q3 release but isn't exactly a catalyst for higher share prices. The takeaway from the chatter is that margin improvement is good, inventory is getting right-sized and right-sided, and there are opportunities for gains in Q4 and next year, but the stock is fairly priced now. 

The revisions include many price target increases and even an upgrade, some price target reductions, and a downgrade. The takeaway from the revision activity is that analysts are holding and supporting the stock but at the low end of their target range. 

The post-release surge in the stock price has the market above the analyst's low target, and there is little in the data to catalyze the market to another run. Most revisions are to levels below the consensus, which continues to trend lower. As it is, the consensus may stabilize near its current level after falling 17% YOY, but assuming it will continue is risky. The holiday shopping season shouldn't be huge, and Target hasn't been the retail store of choice so far this year. 

The technical outlook: Target bottomed, could be retested

While a solid company, Target has some ground to regain. Some risks raise the possibility of its stock price retesting the recent lows. The weekly chart looks strong with a solid green candle, but the daily is not so bullish. The market shows apparent resistance at the critical $120 level, the high set before the pandemic, and momentum isn't all that strong. 

The daily chart shows the market consolidating at the $120 level with an indecisive series of candles and overbought conditions. The market is not guaranteed to fall from this point, but the odds favor another sell-off.