Stocks are heading into the second quarter as if they can’t do any wrong … but unfortunately, history often reminds us that the market tends to surprise us when it feels this way.
Historically speaking, the S&P 500 Index usually finds some strength in the first quarter of each year. But while it has averaged 2% for the first three months of each year since 1950, this year it has gained more than 9% — well beyond the average performance for any quarter of the year. However, it’s a close copy of last year’s Q1, which saw the index rise a whopping 12%.
And like last year, the market feels ready for a healthy correction; the technicals are starting to signal overbought situations at the same time that investor sentiment remains optimistic. We expect a push-pull battle in the final week of the quarter as the bullish fund managers lock in profits at the same time that the bears put money to work to avoid showing too much cash on the next round of quarterly holdings.
One of the strengths for the market in the first quarter was the transportation stocks — a move that made the Dow Theorists happy. For the quarter (so far), the iShares Dow Jones Transportation Average (NYSE:IYT) has returned more than 17%, or about 70% better than the s&P 500. But while we love the performance of the transports, we also recognize that this group is flying high on technicians’ radar screens for profit-taking potential.
With that in mind, here are our three short-term bearish plays on the transportation sector companies:
iShares Dow Jones Transportation Average
Click to Enlarge Right now, IYT shares are trading near a technically overbought condition while at the same time breaking through a short-term technical support trendline (IYT’s 20-day moving average). This technical situation warns of further decline as more traders will start locking in their profits.
If you’re holding the IYT or its SPDR counterpart, XTN, then you should be selling on expectations that the ETFs will decline roughly 5% to their next support level, their respective 50-day trendlines.
More aggressive traders might consider purchasing the May expiration at-the-money puts on the IYT as a short-term short trade to profit from the transportation sector’s next move lower.
Alaska Air Group
Click to Enlarge Alaska Air Group (NYSE:ALK) has been ruling the world of “what’s right” with the transportation stocks, and the prices show it. The stock saw a surge in short interest a month ago, helping to fuel the recent outperformance in the stock as those shorts got squeezed. Now, though, the share price has extended itself into a dangerously overbought situation.
ALK shares are trading more than 7% above their 20-day trendline after seeing their RSI peak above 80 (an extremely overbought reading). We like the pattern and fundamentals for ALK shares, but the stock is likely to retrace to its 20-day trendline, currently at $62.25, before attracting buyers again. Given the technical outlook, we like ALK shares as a short or a long put trade as the 7% decline offers enough downside potential to profit.
The company provides logistics services around the world, which hasn’t been paying off for them as the company’s earnings have missed analyst expectations each quarter for the past year.
Unlike our other stocks of interest, EXPD is not a play on an oversold chart, but instead a trade based on a break through chart support. Today’s price activity is taking EXPD through the $36 level, a site that had held as support. The break now targets a move to $34 before the next round of technical support will kick in, offering an opportunity to short the stock again.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.