Southwest Airlines: You’ll Wanna Get Away From LUV Stock

Advertisement

Biting off more than one can chew can lead to disastrous results, and that’s exactly what investors are fearing for Southwest Airlines Co. (NYSE:LUV).

southwest-airlines-luv-stock-logo-185-NEW

Earlier this week, Southwest announced plans to increase its seat capacity by 8% this year, a 1% bump-up from its previous target. However, this ambitious plan signaled the potential for cannibalization of sales within the airlines industry, causing LUV stock and its competitors to tumble.

Further pain came in the form of fuel prices. Although key energy benchmarks like Brent  Crude are down roughly 45% in value against prior years’ averages, investors quickly speculated an overreaction in the airline markets.

LUV has the ability to leverage lower fuel costs because any new passengers for Southwest Airlines are “free” profit. But the same goes for low-cost leaders like JetBlue Airways Corp. (NASDAQ:JBLU) and Spirit Airlines Inc. (NASDAQ:SAVE). It’s extremely unlikely that they will mope around while LUV eats their lunch.

Of course, there are many that still believe in the airliners’ ability to recover given its relative strength over the years, and some experts forecast a rise in sentiment in the coming summer vacation months. From a volume perspective, this would theoretically be a fundamental tailwind for LUV. Technically, however, LUV stock is hanging on by a thread.

Southwest Airlines, LUV stock, chart
Source: Source: JYE Financial, unless otherwise indicated

Let’s get the obvious out of the way. In just the two days since the market closed on May 18, LUV lost nearly 12% of value, shooting 4.7% below its 200-day moving average. The follow-up session on May 21 — where bullish investors desperately need to make a stand — resulted in a flaccid performance, moving up a comparatively imperceptible 0.11%.

Students of technical analysis — in particular, Japanese Candlestick analysis — may note that the May 21 move forms for the most part an inside day, which typically signals a reversal following a prolonged downtrend. Contrarians should be warned, though, that the depth of the recent selloff for LUV stock makes such gambles extraordinarily risky.

Even if a dead-cat bounce were to occur, LUV would essentially have to fight two resistance ceilings: one that used to be the support line, and then the original resistance line.

Southwest Airlines, LUV stock, forecast
Source: Source: JYE Financial, unless otherwise indicated

Statistically, the markets also favor the bears. Given a weak three-month average performance of -4.73% — one that incidentally follows a bearish head-and-shoulders pattern — LUV stock has only a 40% probability of moving higher by late August. Also, the average reward for taking a contrarian bet is a 7% profit, but this pales in comparison to a 10% potential loss.

There’s no doubt that airliners are having a rough go in the markets and that conventional wisdom suggests buying when others are selling. However, for LUV and many others of its ilk, the real pain is just beginning.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

More From InvestorPlace

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2015/05/southwest-airlines-investors-wanna-get-away-luv-stock/.

©2024 InvestorPlace Media, LLC