Airlines have been through heck and back during this crisis. People all over the world are still mostly sheltering in place. American Airlines (NYSE:AAL) and its cohort averted disaster but barely. AAL stock rebounded really well given the risks it faces. What helped its performance on Wall Street was that the stock market in general went bonkers. It doesn’t make sense yet here we are setting records with no end in sight. The action into the close yesterday and overnight is breaking new all time records.
In contrast to this extraordinary rally in stocks, AAL stock is down 36% in a year when the SPY is up 15%. The best of the major airlines stocks is Southwest Airlines (NYSE:LUV), which is down only -15%. That is bad but that is also the reason to own them. From here, they have very little froth to shed. They’ve suffered a crash diet that went too far, and they are trying to get healthy again.
The easiest investment thesis is to own AAL for the long term. Eventually they will recoup their pre-virus levels but it might take a while.
Trading Can Also Be Fun
Meanwhile, there is a lot that active investors can do to create faster opportunities. I will call this the trading thesis.
In early December I wrote and I cautioned that AAL stock momentum was too hot. From a trading perspective, the risk of a dip was high and vulnerable near term. Although I didn’t catch that top perfectly, I did pretty well. AAL stock fell 13% from that and found footing just under $15 per share.
I wasn’t bearish the stock because my message was clear: “…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.” That was exactly what happened and led to a 50% January rally. Over the past few quarters, the bulls have established a solid zone of support. This is a good plateau from which they can orchestrate more upside. This means that dips into anything below $15 per share are now buying opportunities.
The reaction from the earnings report was too bullish so it was time to repeat the December dip process. Expectations into earnings were too gloomy, so the stock exploded upward in relief. This was also about the time the shenanigans with WSB and GameStop (NYSE:GME) happened. That fiasco may have contributed to the upside in this one too. That cocktail of jubilation lost its luster quickly but here is the exciting part. The dip is holding at higher-lows so our trading thesis is so far valid.
Losing the spike causes little harm because support is holding well. Besides that rally was not how normal upside should unfold. The bulls should have confidence so they won’t sell in panic. The only problem I see with that strange spike is that it may have ruined the clean neckline at $18.60. Had it not happened, we would still have it as a perfect catalyst for a beautiful bullish pattern to target $24 per share. This may still unfold but now it’s a little murky. Eventually AAL stock will get there but it will have to slice through a bunch of resistance.
The Strategy for AAL Stock Is Simple
The bottom line here and with all airline stocks is that they have survived near-death. The test that they went through last year is not going to repeat anytime soon. The pain did not come from the virus itself, but from the decision to close down the world. Governments cannot afford to do that again, so it’s not likely to recur. The ascending momentum that started in November should continue. AAL stock will set higher-lows as it attacks every hurdle along the way.
The overall strategy is to buy the dips while holding it for the long-term recovery. If investors use options they can employ dozens more clever ways for profit. Selling naked puts to own the shares is my favorite. Doing that on really bad days is the most exciting. When a stock is falling fast investors panic. Put sellers can take advantage of that and collect a ton of premium. The worst that could happen is that they buy the shares lower and collect some money on top of that.
So far we haven’t mentioned anything about the fundamentals and they are still horrendous. I am not burying my head in the sand, because this crisis is not their fault. A few days before the lockdown they were running a profitable business then it stopped. According to the TSA website, air traffic in the U.S. is still down 60% to its usual run rate. The fact that these companies are still in business is astonishing. It shows the maturity of management and the the confidence they have in their staff.
Yes, fundamentally the company is still in shambles. However, judging AAL stock based on its P&L metrics now is ridiculous. The recovery process is ongoing and far from over. We still have months to go before travel demand recovers well enough to do that. Meanwhile we use charts and/or logic to judge entry points. I don’t chase it on huge spikes and I don’t panic out of it on big dips.
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.
