Shares of Boeing (NYSE:BA) have rallied over 10% since touching lows near $330 in mid-August. Some of the liftoff was indeed warranted, as the ill-fated 737 MAX may finally be ready to be relaunched. Boeing stock has come too far, too fast, though. The stigma surrounding the crashes along with the ongoing tariff turmoil should continue to provide some serious headwinds to the recent red-hot rally. Look for BA stock to struggle near current levels.
The main impetus behind the recent rally was rumors that the Boeing 737 MAX was likely to conduct certification flights in October. This would hopefully clear the runway for the troubled plane to return to the skies. The U.S. Federal Aviation Administration, however, said they had no timetable for returning the 737 MAX to service. Patience and diligence will likely be extreme on the heels of two fatal crashes attributed to the 737 MAX.
Not all is rosy for Boeing stock, however. News that the U.S. Department of Defense scrapped a $5 billion contract for the Redesigned Kill Vehicle program should definitely temper any euphoria surrounding the rumored relaunch of the MAX 737.
BA Is Overbought
Boeing stock is certainly no bargain on a valuation basis. The trailing price-to-earnings ratio for BA is over 40 and stands at by far the most expensive level of the past 10 years. Similar metrics, such as price to sales and price to free cash flow, are also similarly expensive. It will be difficult for Boeing stock to head higher based on any additional multiple expansion. Indeed, a multiple contraction appears the more likely scenario, which would be a definite negative for BA stock going forward.
BA stock is getting decidedly overbought from a technical perspective. The five-day relative strength index now sits at the highest level since Boeing stock made all-time highs at $446. Both MACD and Detrended Price Oscillator are at euphoric levels. BA is trading at a large premium to the 20-day moving average which has been a precursor to a pullback in the past. There is major overhead resistance at the $375 area.
More importantly, Boeing stock had a major reversal day Friday. Shares rallied up sharply to trade at $369 only to get rejected and close near the lows of the day at $356. This type of price action, especially following such a previously strong run up, is many times a sign the rally has gotten overdone. The buyers may finally be exhausted and the sellers have taken control.
The combination of rich valuations and extended technicals make Boeing stock a viable short on any further strength. Initial profit objective would be a move back towards the $330 area. A stop out point would be a meaningful break of upside resistance at $375.
The Bottom Line on Boeing Stock
BA will go ex-dividend in early November which is important for those who short the stock who will be liable for the dividend. To avoid this possibility, selling a bearish call spread using options would be a valid alternative. This is especially true given that implied volatility is near recent highs, meaning option prices are comparatively expensive.
Option traders may want to consider selling the Oct $400/$405 call spread for an 80-cent net credit. Maximum gain is $80 per spread and maximum risk is $420. Return on risk is 19%. The short $400 call spread provides a 12% upside cushion to the $356.01 closing price of Boeing stock and is well above the $375 resistance area.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
