The airline space has been in rally mode, as investors begin to pile back into the “American reopening” trades. Of course, the U.S. Global Jets ETF (NYSEARCA:JETS) exchange-traded fund has been on fire in response, with the JETS ETF rallying 7% at one point on Wednesday, June 3.
So with all this newfound momentum, why should investors avoid the JETS ETF?
While the ETF is up 52% from the lows and is outpacing the S&P 500’s 42% gain, the size of the rally dramatically lags the broader market. In other words, the overall market has retraced much more of its decline than the airline space.
Further, this group still faces significant long-term challenges, even though it’s in favor at the moment. Finally, the ETF’s composition puts it in a tough place as well.
Breaking Down the JETS ETF
The country and the world are getting into the reopening phase. The number of cases from the novel coronavirus have leveled off for the time being, although we’re still recording plenty of new cases each day.
Despite that, citizens are cautiously treading back toward normalcy, as people begin to travel more and go out to eat. We can see this development in the Transportation Security Administration numbers from U.S. airports.
Click to Enlarge
While still down year-over-year, the number of people traveling has gone up considerably against the past few weeks and months. As consumers grow more comfortable being out and about, this number is likely to increase.
Unfortunately, it’s not likely to skyrocket.
That’s going to limit the upside for airlines, particularly as they miss out on their best cash flow and revenue quarters of the year. Typically, that comes from the second and third quarters. While the rhetoric is changing and the tone is becoming more positive, that’s going to severely hamper the airline business.
Consider that Q2 only has a few weeks left and investors will realize that the quarter is pretty much a lost cause. Q3 will have low traffic too, at least initially. As Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV) and others continue to burn cash, the financial strain won’t go unnoticed, even though these companies will avoid going belly up.
That brings me to my next point: the composition of the JETS ETF.
By utilizing a fund, investors are exposed to lower-quality companies. In the top four holdings, American Airlines (NASDAQ:AAL) and United Airlines (NASDAQ:UAL) drown out Delta and Southwest, which have better financial standings.
Trading Airline Stocks
Click to Enlarge
While United, American and other airlines can all bounce hard from the lows, I would rather own quality if I’m going to start dabbling in beaten-down stocks. More so, rather than bottom fish a punished industry, why not buy stocks that are in favor?
Microsoft (NASDAQ:MSFT) said its revenue was largely unaffected by Covid-19. Twilio (NYSE:TWLO) reported a huge quarter with strong guidance. Zoom Video (NASDAQ:ZM) did as well, with guidance well ahead of expectations.
The point is, why bet on those that are struggling — even if a massive dead-cat bounce is possible — when there are clearly stocks that are winning right now?
Admittedly, those that have been hit the hardest can have the largest rebounds too. That may make them great trades, but not necessarily great investments. As for the JETS ETF, that seems to be a great description of the setup. While the components of the ETF will likely face long-term turbulence, the chart favors the bulls.
With Wednesday’s rally, shares hit the highest level since March, as JETS also cleared the 23.6% retracement. On the upside, see if shares can challenge the $18 level, a spot JETS was rejected from in late-March. Above that puts the 38.2% retracement near $19.30 in play, as well as the declining 100-day moving average.
On the downside, a move below uptrend support (blue line) and the 23.6% retracement puts the 50-day moving average in play.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
