Airline stocks had an awesome day yesterday. American Airlines’ (NYSE:AAL) AAL stock rallied 8.3% in jubilation over nothing specific. Partly good news from vaccines and perhaps some more from Boeing’s (NYSE:BA) 737 Max model flying again.
My impression is that expectations of the recovery is getting aggressive. I say this as a person who is mostly bullish stocks. My priority is to spot potential pitfalls because job one for investors is to not lose money. AAL stock has now rallied 55% in under a month. Starting new longs here carries a lot of risk.
This by no means is me calling the top in airline stocks. My goal is to properly frame the potential ranges that are in play here. I want to profit from upside potential. For that to happen, I need to be realistic shorter term. We are now facing a new reality post-pandemic. Nothing like this has happened in our lifetimes so it’s a bit of a mystery. For sure we will have a new normal going forward.
With that context, the new world will definitely not be the same for airlines. First, they will have fewer travelers because businesses and people found convenient alternatives. Corporations are saving fortunes from less travel as they turn to Zoom (NASDAQ:ZM) for meetings. It’s too convenient to meet online to let that go, even post Covid-19. These habits will linger.
Secondly, the new normal will include extra costs for the airlines, like maintaining hygienic cabins. The point is, there are many unknowns that investors will face.
The Good News for AAL Stock
American Airlines just survived the toughest test ever so they are already champions in my book. Things could not have gotten much harder for airline stocks when the world went into quarantine. American airlines stock lost 75% of its value in a blink.
Things are better now, but not by much. That’s part of today’s cautionary tale. I was optimistic on AAL stock back in March when markets were crashing. Since then they cleared many massive hurdles. They even looked past being competitors and considered consolidating flights among airlines.
These are tests that are not likely to repeat anytime soon. Management scrambled to raise cash so that they don’t go out of business and hunkered down to survive.
U.S. Airline traffic is still down 70% to last year based on the TSA daily screening. This is a depressing figure but it also shows the potential that lies ahead.
Social distancing will eventually fade because we are mobile and social creatures. We won’t sit still for too long and eventually we will want to move about the world again. We may not go back to 100% traffic, but there is still plenty of upside to go.
There Are Tough Spots Ahead of American Airlines Stock
Investors are celebrating vaccine headlines from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA), to name two frontrunners. That is not normal price action so there might be hiccups ahead. AAL stock is heading into a prior failure zones so there should be sellers lurking there.
This is not a hard line in the sand because the June rally was furious and left many lines of contention. I expect resistance at $17, $18.40, and definitely at $20 per share.
For a short-term trade, I would book profits if I had them. From a long-term perspective, the better entry spots are on a pullback towards $14. That should now be support going forward. Healthy rallies need the bulls to rest to build a better base. Otherwise they become very frothy and susceptible to crashes like in June. I would much rather have small corrections for the sake of avoiding giant ones.
The message from the medical community is clear: The vaccines are near and they will be very effective. Now it becomes a matter of dispensing them to the world. Wall Street has a habit of pricing things ahead of time. This is somewhat of a concern that they’ve already built much of it into the AAL stock price.
Buy the Dip If and When It Comes
To summarize today’s message, I would say that the bulls are in charge. They deserve a rest if not even a small drop. This would shake out weak hands and build a better base of investors. This is necessary because the resistance above is going to be difficult to overcome.
There is also outside risk from the indices. They are setting records in spite of no real evidence of actual improvements. If they correct they will drag AAL stock with it. I don’t expect a complete debacle like what happened in March, but there is a risk. If and when it comes I will be buying the dip.
Politicians are finally serious about dispensing another round of stimulus. The FED is also committed to its QE infinity. The only variable here is sentiment and it’s very fickle. That’s the only cause for crashes and spikes these days. Wall Street investors are now in the habit of buying and selling on knee jerk reactions.
I know the tone of this write-up is negative but it’s not my intention. I believe in the recovery process, but not as one to be exponential from here. The bulls will be more successful if they temper their enthusiasm along the way.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.