While reviewing Trading Ideas for Friday, we noted that the spreadsheet featured a number of airlines stocks at the top of the list. The day before, Teresa documented a trade set up in United Airlines (UAUA) using bull call spreads to minimize risk.
When one follows an industry or a company progress through the phases of the Investor Sentiment Cycle, the most important thing to remember is to have patience. In early April 2008, I did surveyed the airlines industry and and determined that it was in the Discouragement and Aversion phase of the Investor Sentiment Cycle.
Airlines went through the wringer between April and July. Bearish traders were very happy with the negative price action. Then something funny happened: the top tick for crude oil. Let’s have a look at crude oil chart since April.
Crude Oil (@CL)
Daily Chart with InVivo Swing Trading Tools
On July 15th, 2008 the Airlines Index ($XAL) hit their yearly lows.
Airlines Index ($XAL)
Daily Chart with 50- and 200-day Moving Average
Daily Chart with InVivo Swing Trading Tools
The red line is where most bulls view as a potential breakout area. This can also be an area where bears might try to put up a fight.
As we said in April, the Wall of Worry phase follows Discouragement and Aversion:
Wall of Worry
While the broad indices are still going down, certain sectors will have bottomed. At some point, everyone who wants to sell has done so, and the selling stops. Low prices and relative value returns, and early buyers with deep pockets begin to nibble at the market. The net effect is that the major stock indexes stop plunging and begins to dribble or moves sideways.
This area is where we find a buildup of participants in position to write buy tickets, producing potential buy pressure. With sellers gone, the market even goes up on bad news. Rallies are labeled as ‘technical bounces’ or are written off as ‘short covering’. Short positions add more on every bounce, confident that lower prices are around the corner. When good news trickles in, it is summarily dismissed as aberrations, subject to revision next month.
I have already been hearing that the recent strength of the airlines is nothing but “technical bounces/short covering”‘. It’s a good sign that pundits do not believe that this move is “‘real”. The next thing we would like to see is positive news for a change — oh wait, maybe something like this perhaps:
- Delta, UAL, AMR Rise on Profit Outlook, Drop in Fuel
Delta Air Lines Inc., American Airlines parent AMR Corp. and United Airlines owner UAL Corp. each rose at least 10 percent as jet fuel fell, boosting investors’ confidence in a return to industry profits in 2009.
If someone had said back in April that the story above would be written, they would have been sent to the loony bin. it’s amazing how quickly things can change.
