Monday, April 27, 2009

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.   


dacian said...

Thanks for this new post. Just to resume, a close below 16.08 by the end of April will be a serious sign the market topped and it might go down. Do you expect we make new lows on the main indices? However, in case we go lower than 666 on SPX for instance, do you still maintain your call on the airline sector as a new leader for the coming bull, no matter when it will be launched?

Guy M. Lerner said...


1) a close below 16.08 would be a close below resistance for XAL; I would interpret it bearishly - not a good sign for XAL or market as a whole

2) will the market make new lows? difficult to tell and I have no way of knowing; I will wait for the price cycle to play itself; in all likelihood the time to buy will be when sentiment turns bearish again (ie., bull signal)

3)the airline sector has a high probability of being a market leader because the technical setup is good (possible close above the pivot and downsloping trend line) and because it could undergo a secular change; it will definitely need the market tailwinds to go higher however; of course, this could change with a plunge in prices and in which case we would be far below resistance levels