Tuesday, June 16, 2009

Airline Sector (Follow Up)

The Wall Street Journal had a recent article on the airline sector entitled, "Airlines Predict More Trouble, Broaden Cuts". The airline sector is one of the sectors that I had highlighted back in April as possibly being one of the next bull market leaders - of course, when and if we get that new bull market.

See figure 1 a monthly chart of the AMEX Airline Index (symbol: $XAL.X) with the "next big thing" indicator in the lower panel.

Figure 1. $XAL.X/ monthly

Some of the positive techical factors are:

1) the "next big thing" indicator is in the zone where there is a high likelihood of a secular trend change

2) the close below and then above the pivot at 16.08 is bullish

3) a close above the down sloping trend line is bullish

Negative technical considerations include:

1) a monthly close below 16.08 is bearish

2) prices have yet to close above the simple 10 month moving average

Upside resistance for the airline sector index is at 28.62, which are the lows from the prior bear market which ended in February, 2003.

While the technical picture remains positive (as long as prices remain above 16.08), the fundamental picture, as explained in the article, appears to be afflicted by those factors affecting the economy at large.

"Slumping demand for travel" is consumer retrenchment. "Higher fuel prices" are a tax on all of us and cut into profit margins. "Massive cuts over the past year to industry capacity" is emblematic of the lowered standard of living that Americans are now experiencing.

AMR's chairman and chief executive, Gerard Arpey, stated that today's airline industry wasn't "built for an environment of negative global economic growth and nonfunctioning capital markets." But then again what business or part of our economy was built to withstand this severe economic downturn? Overcapacity and over leveraged are found in all aspects of our economy. Too many malls, too many homes, too many cars, too many airline seats, and too much debt.

Gary Kelly, chairman and CEO of Southwest Airlines, summarizes the fundamental picture: "It's a very difficult time. Earnings are going to be severely stressed until the economy changes."

While we don't need to pit fundamentals versus technicals, the technical picture appears more bullish. Clearly this is one important sector worth watching.

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