Schaeffer's Market Observation Features Wal-Mart Stores and Target.

CINCINNATI -- Featured in today's Schaeffer's Market Observation is Wal-Mart Stores (NYSE:WMT) and Target (NYSE:TGT). This article is just one of the many free market commentaries written every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research.

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Wal-Mart Versus Target, Who Wins?

A Technical and Sentiment Comparison of Wal-Mart Stores (WMT) and Target (TGT)

In the process of perusing the content on our website, I had the pleasure of reading an article penned by our founder, Bernie Schaeffer, titled Schaeffer on Charts: "Shop Talk." The article examines the retail sector, namely the S&P Retail Index (RLX - 499.72) from a technical and sentiment analysis. While reading the article, I began to think of bullish plays in the retail sector, but I have done that recently. Looking for an angle on the retail sector, I asked my colleague, Jocelynn Drake, for some guidance. She suggested a comparison of two heavyweights in the index, specifically Wal-Mart Stores (NYSE:WMT) and Target (NYSE:TGT).

I could bore you with statistics about each of these companies and their market share, but let's keep it quick. WMT is the world's largest retailer, followed by TGT. We have a classic number-one-versus-number-two match up here (couldn't resist the dramatics, what with my Buckeyes rated number one in the freshly released college football BCS poll). That said, let's get into the meat of the discussion with a look at the technical prospects for the combatants.

First, let's examine WMT's technical performance. Of late, the stock has run a bit higher, but I wouldn't call this a comeback. In fact, the stock has run into resistance at the 50 level, which should be no surprise. Since April 2005, this level has thwarted the shares on four different occasions. Conquering this level will not be an easy task, as it is also the site of peak call open interest in the front three-month series, adding strength to the resistance.

The future doesn't look any brighter when looking at WMT's long-term prospects. Overhead resistance exists in the form of the firm's 50-month and 80-month moving averages. Since May 2004, the equity has mustered the strength to close only one month above this gruesome twosome. Now, it does seem that there may be a bit of a bottom set by the 42 level, which has helped the stock rebound twice; however, that is quite a fall from WMT's current perch of 48.37.

It actually appears that options players may finally be catching on to the retailer, as its Schaeffer's put/call open interest ratio (SOIR) of 0.88 is higher than 98 percent of the past year's worth of readings. Moreover, Zacks shows that seven of the 15 analysts covering the company rate it a "hold." Unfortunately, potential short-covering support is insignificant as one percent of WMT's float is sold short, and it would take three days to buy back these shorted shares. Yes, WMT has a Schaeffer's Equity Scorecard rating of 6.0, but I feel that the best play on the stock would be bearish.

Now let's turn to the other side of the retail coin and take a look at TGT. Currently, the stock is battling resistance at the 60 level, which is an all-time high. It seems that there may be a measure of support at the 58 level, but it hasn't had much of a chance to act as support. Furthermore, TGT's 10-week moving average is in the process of advancing through the 54 region. When this trendline catches up, it could provide the push needed to break through the 60 level.

TGT's long-term performance is undeniable. The following chart looks like the kind I would like to have in my portfolio. However, what kind of evidence is there that TGT will continue moving higher. Well, it may be tough to see in the chart, but the equity's 10-month moving average is on the verge of a bearish cross of its 20-month counterpart. If this move comes to fruition, it could signal an impending uptrend. I am more encouraged by the fact that the stock was able to reclaim the support of its 10-month and 20-month moving averages, as this dynamic duo has been the catalyst for TGT's astronomic rise.

The speculative options crowd doesn't seem to be buying what TGT is selling. The retailer's SOIR of 1.39 is at a 52-week high. As is the case with WMT, this pessimism could turn into buying pressure, pushing the shares higher. In another similarity between the two, six of the 15 analysts covering TGT rate it a "hold." This configuration could result in upgrades (which would be good) or downgrades (which would be bad).

Finally, TGT holds a bit more of a chance for a short-covering rally. At its average daily trading volume, it would take slightly more than four days for short sellers to buy back their shorted TGT shares. This configuration could provide the fuel needed for a short-covering rally, which could help challenge the 60 level. This fact is the reason that TGT's Schaeffer's Equity Scorecard comes in at a 7.0 out of a possible 10.

Both TGT and WMT will report earnings in November, so I would keep a close eye on the short interest numbers for any hint at a chance of a short-covering rally. Furthermore, we are heading into the holiday season, which is a make-or-break time of year for retailers.

In a head's-up comparison between the two, the sentiment is rather similar. It is a situation like this that I like to look at long-term performance, which clearly indicates that TGT is the better play.

There have been occasional blips on the radar, but a monthly relative-strength chart shows that TGT has outstripped WMT since January 1992. This outperformance suggests hedging your bets. Take a look at a slightly out-of-the-money, intermediate-term call option on TGT while playing a slightly in-the-money WMT put during the same time frame. The head's up comparison between the number-one and number-two retailers suggests that the momentum lies in the hands of the underdog. Good luck and, as always, happy trading!

Click the following link to see a Weekly and Monthly Charts for WMT and TGT, as well as a Monthly Relative Strength Chart comparing the two: http://www.schaeffersresearch.com/wire?ID=17554 .

Take advantage of the timely Schaeffer commentaries by signing up for their free e-newsletters -- Opening View, Market Recap and Monday Morning Outlook. Click here to have the Schaeffer's commentaries delivered to you free via email every day and get entered to win an iPod Nano. http://www.schaeffersresearch.com/redirect.aspx?CODE=PROAW13M&PAGE=1 .

About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method .