A good investing friend of mine told me to “never own the airlines, only trade them.” Well, it looks as though the airlines are preparing to give the bears one heck of a good trade.
Last year felt like it was the “Year of Weather” delays and cancellations. Every weekend we read about how the weather had affected XYZ million travelers, stranding them in strange lands until time could catch up with their flight plans.
This year appears to be the “Year of the Malfunction,” as plane after plane runs into some sort of physical problem.
This morning, the CEO of United Airlines (UAL) is providing reassuring words to travelers after a plane in San Francisco lost a tire and another in Oregon landed missing a panel.
Layer on top of this the news over the weekend that the FBI was getting more involved with the Boeing (BA) investigation and that there may be Grand Jury indictments?
This weekend’s Barron’s covered the story, coming to the bottom line that the “airlines are cutting summer schedules due to Boeing issues.”
Frankly, this is also part of a seasonality issue.
Over the last 20 years, the airline sector – as measured by the NYSE Airline Index – has a seasonal problem with the second quarter.
The chart below displays the average monthly return for airlines, along with the win/loss percentage for each month. Notably poor are the months of April through June.
Now, seasonality only applies when there is a good theory behind it. In other words, don’t just look at the results and act… make sure you understand “why” the seasonality exists.
In this case, the season in question represents a soft patch for travel as it’s wedged between the busy holiday travel season and the summer travel season. Makes some sense, so let’s run with the idea.
What is more tangible are the problems that the airlines are facing. Higher fuel costs, higher labor costs, fewer planes to fly due to Boeing issues, and travelers that appear to be growing weary of the higher ticket prices.
So, how do you trade this fundamental and seasonal trend?
My first look is at the U.S. Global Jets ETF (JETS). The ETF offers exposure to the airlines only with United, American (AAL), Southwest (LUV), and Delta Airlines (DAL) representing more than 40% of the ETF’s movement.
JETS shares have been rolling over from the top of their recent range at $20, and the weak seasonality should add a headwind, targeting a move to $17.50.
Individually, Allegiant Travel (ALGT) ranks poorly with my technical scoring system as the stock has been a relative strength laggard breaking through key trendlines. This stock currently has a three-month target of $50.
Bottom Line
Watch for the seasonally bearish trend in the airlines to continue through the summer months this year as the airline sector is likely to underperform with rising prices and lower demand.
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.