Wednesday, April 22, 2009

Airlines Act Like Market Leader

The AMEX Airline Index (symbol: $XAL.X) was up 10% yesterday on earnings reports from Delta Airlines (symbol: DAL) and UAL Corporation (symbol: UAUA). Delta Airlines is the world's largest airline and UAL Corp. is the parent of United Airlines.

The airline sector is one of the sectors that I highlighted on April 16 in the article, "4 Sectors That Could Be The Next Bull Market Leaders". Figure 1 is a monthly chart of the Amex Airline Index, and as stated in the article:

"The price action has been bullish from two perspectives: 1) it seems likely that price will close the month above the down sloping, dashed trend line; and 2) this will be a close above a prior pivot low point (noted with red arrows). Closes below a pivot or a trend line that quickly reverse are bullish."

Figure 1. $XAL.X/ monthly

Yesterday's price pop was on narrower first quarter losses. Like many fundamental or economic data points over the past 2 months, the news is still bad but less bad than the prior numbers. And this for the most part would summarize the results from the airlines.

Delta's results missed the Standard and Poor's Equity Research estimates and their analysts lowered its full-year earnings estimate from $1.25 a share to $1.00 a share. However, it was their feeling that industry revenue had hit bottom. Adding to bottom line revenues would be an increase in fees charged to international passengers for a second bag. There was no mention of increasing passenger travel.

United's losses were also less than previously reported and analysts attributed this upside result "as better than anticipated cost performance". There was no mention of increasing passenger travel.

In summary, it is my belief that the airline sector has put in a bottom and could possibly be a market leader in the next bull market (that has yet to launch). At present, the news is less bad than before. Fundamentals have appeared to stabilize, and buyers have rushed in anticipating better times. Of course, stabilization only means that "things" are not getting worse. They are not necessarily getting better. Nonetheless, the long term technical dynamics appear to be improving (and changing) for the airlines sector.


biscosc said...

I find it very interesting that with the hundreds (maybe thousands) of ETF's around they just finally got around to creating one for the airline industry, ticker FAA. I'd say the complete lack of demand for such an ETF for so long supports your view that it might be ready to lead.

Elaine Lerner said...
This comment has been removed by the author.
Guy M. Lerner said...

good point!!