Monday’s market rally offered a lifeline to beaten-down airline stocks. Companies from Delta Airlines (NYSE:DAL) and Southwest (NYSE:LUV) to American Airlines (NYSE:AAL) and Jet Blue (NYSE:JBLU) saw their share prices gain anywhere from 9% to 14% on the session. The profits were legitimized by a surge in volume which confirmed big buyers participated. But that said, I’m still a seller of DAL stock.
Here are three reasons why.
Reason One: Its Sector Stinks
I’m an advocate of something known as “top-down analysis.”
Most stocks exhibit a positive correlation to the broader stock market and their sector. If the S&P 500 is charging higher, it’s a tailwind for all equities. If it’s sinking, then it’s a headwind. The same could be said for sectors. If the Financial Sector SPDR (NYSEARCA:XLF) is falling like an anvil, then it’s going to make it more difficult for individual banks to rally.
Top-down analysis incorporates both of these principles and involves assessing the overall market first, then moving into sector analysis, and, finally, looking at an individual company. For airline stocks, I like to use the aptly named US GLB JETS ETF (NYSEARCA:JETS) to represent the sector.
As the chart will attest, this week’s rise did nothing to change the overall trend trajectory. JETS sits in a downtrend across all time frames. This morning’s gap was rapidly rejected, causing the fund to fall back below the 20-day moving average. Monday’s volume was impressive, to be sure.
At 6.37 million shares, it was the second-largest volume day on record.
But participation isn’t everything. We’ve seen three powerful, high-volume surges since early March before this weeks. And all of them ultimately failed to turn the trend. Tack on the fact that the relative weakness is hilariously bad compared to the recovery in the S&P 500, and I think the takeaway is clear. The airline ETF doesn’t inspire any confidence in shopping stocks in the space.
Reason Two: The Trend Hasn’t Changed
If DAL stock was powering higher on increased momentum, if it was finally blasting through resistance zones and long-term term moving averages, then perhaps we could overlook its sector’s weaksauce behavior. But it’s not. In fact, Delta looks worse than JETS.
During last week’s whack, buyers swarmed to prevent the airline ETF from breaking its March low of $11.25. Delta wasn’t so lucky. It cracked the March 18 low of $19.10 and fell to $17.51 before finally finding a bottom.
The lower low is a sign that the downtrend is continuing, not reversing. Plus, like JETS, DAL stock hasn’t even returned to the north side of its 20-day moving average yet. Guessing that this week’s bounce is the real one, the one that bottom fishers have been waiting for, is pure speculation. I suggest waiting for more evidence before buying. While it may mean you have to buy at higher prices, it could also save you from a world of hurt if the downtrend continues.
Reason Three: Superior Alternatives
The first two reasons are justification enough for warning you away from buying DAL stock right now. But the third is worth mentioning because it should be a consideration for every trade you place.
There are hundreds of stocks you can invest in. Given the current economic backdrop for airlines, as well as the continued bearish performance of Delta and crew, can you confidently say this is one of the best investments you can find?
I can’t. Not right now, at least. Even if I were an advocate of bottom fishing beaten-down names, you have to wait for evidence of a reversal. And we simply don’t have that.
If I had to trade DAL stock here, I’d rather lean short. The past three-day rally has created a bear retracement pattern that is a decent setup for trades like put verticals.
The Trade: Buy the July $21/$17 bear put spread for around $1.41.
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