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Tanger, The Technical Side

|About: Tanger Factory Outlet Centers, Inc. (SKT), Includes: SPG, TCO
Summary

SKT is showing signs of a reversal on multiple time frames.

With over 45% of shares sold short, we could see a huge short squeeze.

The main outfit will be presented using technical analysis, accessorized with a side of common sense.

I'm writing this blog because I can no longer keep silent on a stock that SA readers love to hate. To their credit though, there is every reason to hate it on the surface.

It's a REIT (okay that's good)

It's in the Retail space (uh, wait a minute)

And it's categorized in the most distressed category in REIT-dom, the mall REIT (abort mission! go back to REIT!) 

That's right. The REIT, that's in the Retail space, that is categorized in the Mall REIT sector is Tanger Factory Outlet Centers, Inc. (SKT) and I think it's heading higher.

Short Interest Matters When the Tide Turns

According to TD Ameritrade data, SKT has 49.15% short interest as of 8/15/2019. With 92.82 million shares outstanding, that means that 45.62 million shares are sold short. The stock has an average 10-day trading volume of 2.36 million shares. That means that it would take over 19 days on average trading volume for everyone shorting SKT to cover their short positions (45.63/2.36). 

Though, in reality, when a short squeeze happens, all those shares get covered in a much shorter amount of time. With the usual amount of daily sellers and an out sized number of daily buyers, this sends the price of the stock rocketing higher as short covers need to pay higher and higher prices to close their positions. Why would short sellers rush to cover in such a hurry you might ask? Basically it's because as a short seller you are exposed to unlimited risk. If you purchase a stock not using margin, the maximum amount of money you can lose on that position is the amount of money you paid for the stock if the price goes to $0. However if you short a stock, you now need to purchase those shares to close that position, and that stock price can theoretically rise infinitely. 

In a stock like Tanger where almost half of it's outstanding shares are sold short, you better believe that every short seller knows how high the short interest is. And none of them want to be the last to cover their shares! Think about the psychology here as if YOU were short shares of SKT right now. If you had a short position with an average price in the $30-40 range, you might be able to shrug off losing 20-30% of your profits (you've also been paying the dividend back for 2 years). It would still really stink to give back that much paper. But what if you jumped on the bandwagon late and the average price on your short position is sub $20? And what if all of a sudden you wake up tomorrow and see the stock price up 15% pre-market? You're now losing money, with a real fear you could lose a lot more, and you KNOW there are tons of more short sellers needing to cover their shares too. Most short sellers would cover. Fear drives the trade. For those thinking "I'd wait for a pullback to cover my shares", the reality is, is that on the first pullback, there's so many shares to buy back that the drop only lasts a few minutes or hours before shorts drive the price right back up. Good luck nailing that one as a home gamer.

The Technicals

Sorry for the short interest rant, but I feel it's a big part of why I think SKT is heading higher. As a technician, I do more analysis on market dynamics than I do on the stock's fundamental analysis. To be clear, I have done no fundamental research on Tanger of my own. But, even if everyone who has done extensive research on this name and is bullish is wrong, I still think that the stock is heading higher in the short to intermediate term. My price targets on the way up are at $16.75 and $20.00. That's a 12.7% rise on the low end and 34.6% on the high end. Here's why:

I apologize if this is too hard to see, but it's a daily chart of SKT going back to January 2017 showing candlesticks, daily volume, 14 day RSI, and MACD in order from top to bottom. 

Without really getting into how to use these indicators or why I use them, the big takeaways that you can see for yourself here are:

-The large red volume stick that kicked off the last move downward. As far as I can tell from my charts that go back since inception, this was the largest volume price drop in the stock's history. It occurred on July 31st.

-The increase in overall volume since that day (in general, the volume bars remained elevated overall after that day).

-The very recent pickup in volume as the price rebounds off lows.

Put these all together and without any other information, it tells me that while someone has been selling out of SKT, someone else has been buying in. For the amount of volume that traded on July 31st, the stock price should have really cratered much more than it did if there were no buyers. It moved $0.74, or 4.5% on the day while trading on the heaviest volume it has ever traded in a single day. For reference, it traded up $0.54 cents today on 1/6 that volume.

Think about this not to the exact cent to see what I'm saying here. The only way for these two days to happen the way they did, with the volume difference they had, is for there to be more buyers on the day it fell $0.74, than there were sellers on the day it rallied $0.54. Now obviously, the price fell an additional 13.3% since July 31st before bottoming at $13.61. Sellers were more aggressive than buyers. What I was waiting to see was when the bleeding finally stopped how the rally would unfold. So far, we've had increased buying volume come in between $14 and $14.87. A positive short term signal, and clearly there are now more aggressive buyers than sellers.

Here's the same chart but on a weekly time frame. All indicators are also on a weekly time frame. 

The big takeaways that you can see for yourself here are:

-Last week's (the most recent) red candle formed a weekly hammer pattern. This is a short term reversal pattern. I do not use patterns as a reason to make a trade, but this pattern is one of the best in the book. A true hammer reversal should be at the end of a long downtrend and it should open at the lows, or lower than the close of the previous candle. It basically is a representation of sellers pushing the price down all week, and toward the close of the week, buyers coming in to push the price back up to the week's highs, which is a bullish indication. 

-An immediate rally on the following hammer candle (currently happening, but still in progress since this is a weekly chart).

-What's known as a "bullish divergence" on the RSI and MACD indicators. In a downtrend, this is when the indicators fail to make a lower low (could be the same low as in the case of the RSI) while the stock price makes a lower low. It's a bullish indication that the internals of the stock are turning ahead of the price action.

I use both weekly and daily charts to put what I'm seeing in a shorter time frame into perspective on a larger time frame. When the short and intermediate term pictures both appear to be signalling the same thing, you increase the probability of the signals being right. In the case of SKT, both the daily and weekly charts are providing clues that the downtrend is over and we can expect, at the very least, a short to intermediate term rally. 

Price Targets and Conclusion

My price targets are based purely on support and resistance levels. $16.75 was an area of resistance in June and July multiple times, while the $20 level acted as big support during the 2018 ruts. These price levels should be areas of importance as the stock price attempts to rally through them. You can expect a pullback or a consolidation at these price levels. The key for longer term holders is to make sure those pullbacks or consolidations are happening on lighter volume than the rallies leading into them. 

From a risk perspective, the reward:risk ratio is very attractive for the intermediate to long term holder. Let's say my theory is completely wrong. I'd exit a position in SKT at a fresh 52 week low at $13.60 to avoid too much downside. Assuming you were to have bought at today's closing price of $14.87, given a $20 price target, you can still find a potential 34.5% gain plus dividends. However, at the lower price target of $16.75, the reward:risk is not worth a trade.

I expect most readers are longer term holders/haters, so the $20 price zone is what I'd focus on for year end or into 2020. Another bullish note before I close - I think a lot of what's in this analysis on a weekly and daily time frame can be applied to stocks like SPG and TCO, which are lumped into the same category as Tanger. If the mall and/or retail sector gets a bounce, that would add even more fuel to Tanger's fire in a rally. 

Disclosure: I am/we are long SKT, SPG.

Additional disclosure: I wrote this article myself, and it expresses my own opinions. Any statistical data stated in this article is taken from publicly available sources, and is not my own. I am not receiving compensation for this article. I have no business relationship with any company whose stock is mentioned in this article.