Airline stocks are finally taking flight. Their departure has been a long-time coming. For weeks, American Airlines (NASDAQ:AAL) and its peers have been parked on the tarmac, fueled up, and ready to go. What they lacked was a catalyst — a reason for buyers to return to the industry. Bulls were too busy chasing tech stocks to the moon, and sentiment surrounding the reopening trade had soured. But patience has finally paid off in AAL stock.
We could point toward multiple factors for the takeoff, but I think the most important variable is the capital influx into small-cap stocks.
When you look at stock performance through the lens of market capitalization, it reveals where the masses are moving their money. In turn, we can conclude sentiment and risk appetite.
The Money Merry-Go-Round
The go-to benchmark for small-cap stocks is the Russell 2000 Index. In June, its recovery stalled out, and for almost two entire months the Index meandered. Traders left its shores in search of bigger gains elsewhere. Airliners like AAL stock were among the tickers being left to languish. The money fleeing the little guys found a new home in the protective arms of large-cap tech stocks. As a result of the steady drumbeat into the big boys, the Nasdaq notched record highs virtually every single week.
As we’ll see in the chart for the AMEX Airline Index below, during this period of indifference toward the little guys, airline stocks drifted.
Without the lift of small-cap strength, AAL stock was unable to leave the ground. Fortunately, we finally saw rotation over the past week. With the tech sector in the stratosphere, traders decided to ring the register and shift capital into small-caps. With the RUT once again powering higher, bullish momentum has been restored to airlines. The fact that casinos and hotels have been hopping as well tells us that the reopening trade is making a comeback.
Since pivoting on Aug. 3, the Airline Index has risen for five of the past six trading sessions, gaining nearly 20%. The rally allowed XAL to push above its 20-day and 50-day moving averages. While it’s true that moving averages are rendered mostly useless in a range, rising above them is a prerequisite to starting a sustainable uptrend.
The upper end of the consolidation zone has been defined by $57.50. Tuesday’s jump finally carried us beyond it, signaling an upside breakout that could shift the sentiment surrounding American Airlines and the other major carriers.
The AAL Stock Chart
The chart for AAL stock is singing the same song as the industry. Yesterday’s rally pushed the shares to a new two-month high, clearing the prior pivots that defined the upper end of its range. At the same time, we also returned to the north side of the 50-day moving average. At this point, there’s little that stands in its way until $18. That leaves a nice pocket that could create some nice gains if the small-cap strength continues.
While we may not see something as explosive as June’s pole-vault, the path of least resistance is nonetheless higher.
The out-sized volatility of AAL stock makes for some exciting options trades. Here are two to consider.
High Probability, Lower Reward
Sell the Sept $12 put for 85 cents. If the stock sits above $12 at expiration, you will capture the max reward of 85 cents. Wait for a break of a previous day’s high before pulling the trigger. That will signal the upswing is continuing.
Low Probability, Higher Reward
Buy the Oct $14/$18 bull call spread for around $1.15. Once again, I’d wait for a break of a previous day’s high to confirm. The max loss is $1.15, and the max gain is $2.85.
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