Target Corporation (TGT) and Wal-Mart Stores, Inc. (WMT) tend to trade on opposite ends of the spectrum – Target outperforms when the economy is doing well while Wal-Mart tends to outperform when the economy is doing poorly. So, is now the time to switch the famous retail pair trade?
Since the beginning of the year, Target Corporation (NYSE: TGT) has outperformed Wal-Mart Stores, Inc. (NYSE: WMT) by nearly 30 percent as the economy begins to show signs of recovery. Consumers that had been going to Wal-Mart for cheap goods began to seek out Target stores in search of higher quality brands at slightly higher prices.
The Target-Wal-Mart pair trade is constructed by going long on Target and going short on Wal-Mart during good times and vice versa for bad times. The result is an isolated trade that extracts only the difference between those two stocks from any larger movements in the retail sector. However, a bet in the wrong direction can produce larger losses than individual ownership.
So, is long-Target and short-Wal-Mart the right side of the trade? The answer to that question depends largely on the movement of the overall economy, which remains hotly debated by economists and investors. Bulls believe that a recovery is already in the works, while bears insist that the economic improvement is just a illusion and things could get much worse.