Walmart (WMT) Bulls in Charge Ahead of Earnings

Dow component Walmart Inc. (WMT) will release second quarter 2020 earnings in Tuesday's pre-market, kicking off a heavy reporting week for the retail sector. A recent surge in Wall Street upgrades reflects growing optimism that many brick-and-mortar chains will recover more quickly than expected from the COVID-19 pandemic. Even so, the virus has already reshaped the industry, with a greater share of sales going to Amazon.com, Inc. (AMZN) and other e-commerce portals. 

Key Takeaways

  • Walmart stock is trading close to an all-time high, but accumulation readings are unusually weak.
  • A healthy breakout will require a buying surge into the mid-$130s.
  • Many analysts believe that brick-and-mortar retailers will recover from the pandemic more quickly than expected.

Analysts are looking for the Arkansas retailer to report earnings per share (EPS) of $1.26 on revenue of $134 billion. The stock "popped and dropped" after Walmart beat first quarter 2020 estimates in May, closing in the red, ahead of steady downside that found support at the 200-day exponential moving average (EMA) in June. It has been on the recovery trail since that time and is currently trading just a few cents shy of July's all-time high at $134.13.

Walmart Well-Positioned for Breakout

Walmart stock is well positioned to break out in a sustained uptrend after the news, but buying volume has slumped badly since April, dropping to mid-2019 levels. This bearish exodus highlights the ongoing rotation into big tech and growth plays at the expense of the pandemic's biggest winners. That makes this week's price action harder to predict because it will take fewer sellers to generate substantial downside.

Wall Street consensus on Walmart is highly bullish, as it has been throughout 2020, with a "Strong Buy" rating based upon 18 "Buy" and 5 "Hold" recommendations. No analysts are recommending that shareholders sell positions and move to the sidelines at this time. Price targets currently range from a low of $130 to a Street-high $160, while the stock is set to open Monday's session $9 below the median $142 target. This placement bodes well for higher prices after the news.

Sector rotation refers to the act of shifting investment assets from one sector of the economy to another. Sector rotation involves using the proceeds from the sale of securities related to a particular investment sector for the purchase of securities in another sector. This strategy is used as a way to capture returns from market cycles and to diversify holdings over a specified holding period.

Walmart Daily Chart (2012 – 2020)

Daily chart showing the share price performance of Walmart Inc. (WMT)
TradingView.com

Walmart broke out above the 2000 high at $70.25 in 2012, entering a modest uptrend that topped out just above $90 in the first quarter of 2015. The stock got pummeled with other retailers into year end, with the surging e-commerce industry taking market share at a steady pace. The 2016 Jet acquisition allowed Walmart to play catch-up with digital rivals, setting off an uptrend that reached new highs at the end of 2017.

The stock struggled after President Trump fired the first shot of the trade war with China in January 2018, easing into a corrective pattern that drew the outline of an ascending triangle. It broke out in June 2019 and carved three new highs into February 2020, establishing resistance near $134 that is still in force. A strong report could break that barrier on Tuesday, but bearish volume divergences are likely to continue for months, keeping a lid on the upside.

The on-balance volume (OBV) accumulation-distribution indicator ended a long-term uptrend in February 2018 and rolled over into year end, posting a 17-month low. Buying power in 2019 stalled at the prior high, while two 2020 tests failed to exceed that formidable barrier. Walmart has been under steady distribution since April, in contrast with price action that just hit an all-time high. It is best to act cautiously with this conflict in place because it reveals inadequate institutional sponsorship.

On-balance volume (OBV) is a technical trading momentum indicator that uses volume flow to predict changes in stock price. Joseph Granville first developed the OBV metric in the 1963 book Granville's New Key to Stock Market Profits.

The Bottom Line

Walmart stock is well positioned to hit new highs after Tuesday's earnings release, but a bearish volume divergence could limit gains in coming months.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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