The experts have been wishy-washy at guesstimating the time frame for a Covid-19 vaccine — and that has played havoc with travel names like United Airlines (NASDAQ:UAL) stock.
The nuance is in the details between when the a vaccine will be “known” versus “available.” Dr. Anthony Fauci has become a household name … and that’s not necessarily a good thing. But it is important to listen to which timeline he mentions.
Yesterday, Moderna (NASDAQ:MRNA) stock announced that they are on faster track than previously thought to finding a vaccine.
This added fuel to the fire that Federal Reserve Board Chairman Jerome Powell had started during his testimony on television the night before. Stocks that were sensitive to the lockdown like United Airlines rallied hard.
UAL stock spiked 21% in one day and more this morning as it tries to build a base. It is still too close for comfort because it would take but a one headline hiccup and down it would go.
These mad swings are examples of how much emotion is on Wall Street these days. The fundamentals for United Airlines did not change overnight, but the perception of its outlook did. So far the discussions have been weather the airlines will make it out of the crisis or not. This is a heated debate case in point a few weeks ago on CNBC billionaire investor Chamath Palihapitiya argued that some should fail. More recently Boeing (NYSE:BA) CEO David Calhoun echoed with similar comments about the likelihood of a major U.S. Airline folding. BA stock spiked 12% on Monday and that is definitely a rare occurrence.
UAL Stock Has Made Progress But Still Faces Challenges
The outlook for airline stocks is still the same today as it was last week. Air traffic is still down 90% to this time last year. That is no reason to rally stocks, so they are still at a severe disadvantage.
Airlines were barely eking out a profit even before the virus, and if they have to set restrictions going forward then things will go from bad to worse. There is no way to maintain six feet of distance between passengers on a plane — unless you want it 80% empty. Even if they cap airlines at 50% capacity, then everything has to change. Prices will definitely need to rise at a time when 23 million citizens are out of work. This will further negatively impact the consumer flying habits.
UAL stock is stuck in a catch-22, and there’s no easy way out of it.
I caution against the exuberance chasing 25% spikes like these. The charts suggest that UAL is still trying to find a bottom. It may not have finished crashing yet while the indices are close to challenging their highs.
If for whatever reason UAL stock falls below $17.50, this will open a trapdoor below that could eventually bring new all-time lows.
If you think that this is crazy, I remind you that United has filed for bankruptcy before. Anything is possible. We just don’t know what the headlines will bring.
Avoid Chasing the Herd and Trade with Knowledge
I know one thing for sure — chasing massive rallies leaves investors vulnerable to fast losses. Unless the time frame is for the super long term, after a massive pop it is more likely to have short-term losses than profits. The timelines for a vaccine are iffy at best. Without a miracle, it looks like 2020 will not be the year to have one.
On one hand the experts say that vaccines require two to five years to develop. On the other hand, Dr Fauci says 12 to 18 months. This leaves investors with a lot of room for interpretation and potential for disappointment.
Investors should use logic and charts as unemotional guides through this headline mess. There is no sure way of finding perfect entries into UAL stock, but I would definitely let it cool off a bit here to build a better base.
Alternatively, I would use the options to sell puts well below current levels in order to get long the stock now with room for error. For example, investors can collect $3.5 per contract for selling the Dec $16 put. If the stock stays above that level then it’s pure profit with no out-of-pocket expense. Else they own the shares at $16 and break even at $12.50. This is a $30% buffer from the crash low.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
