Airlines: Follow This Sector

Last week when the AMEX Airline Index (symbol: $XAL.X) spiked 10% for the day on so so but better than expected earnings out of Delta Airlines (symbol: DAL) and United Airlines (symbol: UAUA), I was so full of myself because just the week before I had highlighted the airline sector as a possible leader in the next bull market.

So let's fast forward to today, and the news that the spread of swine flu could lead to a decrease in air travel has crushed the airline sector.  Last week's 10% gain was eclipsed by this week's 10.62% loss.  Whether true or not, this was the "reason" given for the drubbing.  Let's not forget that this is still a bear market, and today's thrashing after last week's gains only highlights this fact.

When I highlighted the sector as a possible market leader in the next bull run, I felt that it was important to have the overall market move higher in concert as a necessary tailwind to the development of this secular story.  As I stated in this week's sentiment outlook, it is my belief that the market is putting in an intermediate term top.  So maybe this is just profit taking in a bear market as selling fear is never a good strategy.  Personally, I never put much credence in the "reason".  

Regardless of today's action, the airline sector remains extremely important to watch.  See figure 1 a monthly chart.  A monthly close over the prior pivot low (noted with down red arrows) at 16.08 would be bullish.  This would also be a close over a down trend line formed by two prior pivot highs.  The "next big thing" (not shown) is in the zone where we expect a secular trend change.

Figure 1. $XAL.X/ monthly

In summary, today's action in the airline sector reminds us that we are still in a bear market. However, all is not lost as it will be important to see where the airline sector closes by the end of the month.  It is my belief that a failure to make an end of month close above 16.08 would be an ominous sign for the sector and the overall market.  A close above 16.08 would be a positive, and it would make this sector worth watching when the next bull run comes around.