The stock market has been under pressure over the last few weeks as momentum favorites in big tech and biotech have rolled over badly … and airline stocks such as American Airlines (AAL), United Continental (UAL) and Southwest Airlines (LUV) are no exception.
It has been a big reversal of fortune for these stocks — carried merely by their popularity, as ridiculous price-to-earnings multiples brings back memories of the dot-com bubble — which have helped keep the Nasdaq-100 above its 20-week moving average since late 2012.
But it’s all coming apart now as investors realize the game is up. What started in stocks like Amazon (AMZN) and Facebook (FB) is now spreading to other areas where persistent momentum has led to complacency. That includes airline stocks, which have been on a tear over the last three years. Delta Air Lines (DAL) has more than tripled.
Here are three airline stocks that are hitting turbulence — making them attractive short-side opportunities as the bulls are forced to take profits.
Airline Stocks: American Airlines (AAL)
Click to Enlarge American Airlines (AAL) shares have lost their 50-day moving average as investors react to disappointing March traffic figures as severe winter weather bites into profitability.
Moreover, AAL has been mired in a contract dispute with its pilots as a labor shortage begins to emerge — empowering the union and shifting the balance of power back toward workers after years of it being the other way around.
It’s also not helping that the International Air Transport Association cut its fiscal 2014 airline industry profit forecast to $18.7 billion vs. $19.7 billion prior.
I’ve recommended the AAL April 35 puts to my clients.
Airline Stocks: United Continental (UAL)
Click to Enlarge United Continental (UAL) shares are testing the support level of a four-month trading range on a surge of negative volume. As a result, the 20-day MA has dropped below the 50-day for the first time since October — threatening UAL stock’s post-2012 uptrend.
I’m looking for a move down to the $38 level, which is the 50-week moving average — a line in the sand that UAL stock held last fall.
I have recommended the UAL April $43 puts to clients.
Airline Stocks: Southwest Airlines (LUV)
Click to Enlarge Southwest Airlines (LUV) breached its lower Bollinger Band on an intraday basis on Tuesday for the first time since last August after the Wall Street Journal published a story last week on the company’s troubles with labor unrest, higher costs and its bygone days as a nimble upstart.
LUV also has seen its price advantage over rival domestic carriers dwindle during the past few years — with Southwest’s average one-way fares rising 21% since 2008.
Shares of LUV haven’t suffered a significant downtrend since early 2012 and are overdue for a correction after more than tripling since then.
I’ve recommended the LUV April and May 23 puts.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.