One of the reasons many investors choose to “sell in May and go away” is to avoid what they believe are the summer doldrums.
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For years, almanac investors have theorized that the market is bound to produce lackluster performance during the summer months thanks to a dearth of volume and activity. Unfortunately for these traders, the numbers just don’t add up.
When you look back at the historical performance of the S&P 500 during June, July and August from 1928-2015, you see that it is actually the top-performing three-month period of the entire year.
However, while the theory of the summer doldrums doesn’t hold up for the stock market as a whole, there are certainly stocks that don’t currently have a lot of momentum behind them. The market is facing pressures this summer — like looming interest-rate hikes from the Fed, unstable economic conditions in China and Europe, and a volatile oil market — that it hasn’t faced in summers past. That’s having an impact on various sectors within the market.
We’re going to take a look at five drowsy stocks from among these sectors that don’t appear likely to snap out of their malaise anytime soon.
Alcoa (AA)
Click to Enlarge Alcoa Inc (AA) has struggled to gain its footing as aluminum prices have fallen in the face of weaker global demand and a stronger U.S. dollar (USD). Commodity prices and the USD tend to have an inverse relationship because commodities are priced in USD on global exchanges. That means when the USD increases in value, the commodity tends to decrease in value. There are a number of ways to play this situation (as we’ve found in SlingShot Trader), and Alcoa looks like a good one, given the weakness in aluminum.
In fact, if you compare a chart of AA with the U.S. Aluminum Index, you will see they move almost in lock step with each other. This doesn’t bode well for AA, as the USD could be getting stronger again if the Federal Open Market Committee (FOMC) decides to raise interest rates at its June 15 meeting.
With bearish pressure being applied to aluminum prices and the current broadening formation on the chart, AA doesn’t look like it is going to be able to break out of its congestion range anytime soon.
Boeing (BA)
Click to Enlarge Boeing Co (BA) is somewhat related to Alcoa because much of the reduction in demand (compared to previous expectations) for aluminum has come from the aerospace industry. Even the announcement that the United States is lifting its arms embargo on Vietnam hasn’t been able to spark a rally in aerospace stocks such as BA.
Looking back over the past two years, BA has been stuck between ~$115 on the downside and ~$150 on the upside, with a brief break above this level in early 2015. However, the stock’s trading range seems to be narrowing, with solid resistance at $136.
Delivery delays on military orders like the KC-46 aerial refueling tankers, and escalating competition not only from Airbus Group (EADSY) but also from Bombardier Inc (BDRBF), are likely to keep this stock in a (here comes the obligatory airplane pun) holding pattern for the summer. At SlingShot Trader, we’ll certainly be looking to exploit that, and you’ll want to as well.
Delta Air Lines (DAL)
Click to Enlarge Delta Air Lines, Inc. (DAL) has been consolidating in a $12 range, between $40–$52, for more than a year and a half…and just like one of the companies that supplies its planes — Boeing — and one of the companies that supplies the aluminum for those planes — Alcoa — DAL isn’t showing any signs of breaking out.
Airline stocks like DAL were one of the many beneficiaries of falling oil prices in 2014 and 2015, creating bullish profits for us at SlingShot Trader. However, now that oil is starting to rebound, DAL is feeling the squeeze. The rising U.S. dollar (USD) is also hurting the company’s FX margins, as overseas revenue is worth less when repatriated and converted from the foreign currency in which the revenue was generated.
DAL has increased its capacity to 22.067 billion available seat miles (ASM), but the company recently announced its passenger revenue per ASM was down 5% in May as the U.S. State Department has issued travel alerts for Europe due to possible terror attacks and South America due to the Zika virus. Watch for this stock to continue its lackluster performance this summer.
Bed Bath & Beyond (BBBY)
Click to Enlarge Bed Bath & Beyond Inc. (BBBY) is trying to recover during an incredibly difficult time in the retail sector, but its efforts simply haven’t been enough.
During its latest quarterly earnings announcement in early April, BBBY management announced the company was going to pay a dividend for the first time. It also announced BBBY was going to buy back as much as 30% of the company’s current float. This news helped the stock to rally in late April after an initial post-earnings price plunge, but the stock has not been able to hold onto those gains.
Instead, BBBY has dropped back down to its 52-week lows at $42. The tighter trading range the stock has been working within since late 2015 appears to have a solid grip on BBBY…with little in sight in the near future that could break the consolidation.
Eli Lilly (LLY)
Click to Enlarge During the past few years, Eli Lilly and Co (LLY) has made the strategic decision to focus its research and development assets on creating drugs for proven markets. In other words, the company has looked for markets that have already proven successful for other drug makers and then jumped in with drugs of its own.
While this has reduced the risk of creating a drug that nobody is willing to pay for, it has also increased the competition LLY has faced when entering the market with a new drug. Other companies have been able to achieve higher margins by charging more — but LLY hasn’t because insurance companies and other pharmaceutical benefit managers have been able to negotiate cheaper prices by playing LLY off of its competitors.
The pipe-top candlestick formation in mid-May at $78 has solidified resistance at this level, and it seems LLY is likely to stay well within its longer-term down-trending channel in the short term.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
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