Stocks Going Places, Part 2: Airlines


Yesterday, we took a ride on the railroads. Today, let’s take a look at airlines.

It’s an especially good time to check out this group because investing legend Warren Buffett just said he might look to buy an entire carrier — just like his Berkshire Hathaway (BRK.B) colossus gobbled up railroad Burlington Northern Santa Fe in 2010.

But there might be other reasons to like the group beyond mere words from “Oracle of Omaha.”

First, as TradeStation’s Data Science team highlighted late last year, the Dow Jones Transportation Average confirmed the current bull market by making a new high during the fourth quarter.

Second, the economy has remained strong in the new year. That tends to be good for a cyclical industry like airlines, given their exposure to business travel and vacationing.

Third, despite that cheery backdrop, airlines took a beating last month after United Continental (UAL) said it would add planes to compete with low-cost competitors. Haunted by the ghosts of price wars in years gone by, investors responded by selling, selling and more selling. Delta Air Lines (DAL), Southwest Airlines (LUV), American Airlines (AAL)… downdrafts swept them all lower. They remained in descent as the broader market crashed in early February.

Never mind those same companies having good news of their own. AAL, for instance, on January 10 raised its pricing outlook. DAL shot higher on similar news the next day. Ditto for LUV on January 25. Executives also predicted positive impacts from recent cuts in U.S. tax rates. The market ignored that good news at the time, but will it start to notice now that Buffett’s interested?

Chart watchers may find something else to love: a “Golden Cross” on the Arca Airline Index ($XAL on the TradeStation platform). That’s when the 50-day moving average rises through the 200-day moving average. It’s one of the most common patterns used to signal a change in long-term momentum.

One final note: The index is also challenging the same 120 area where $XAL broke down following the September 11 terrorist attacks. A lot has changed in the industry, the market and the world over these past 17 years. Are the airlines finally ready to make a comeback?

Airline index golden cross
Circle shows 50-day MA rising through 200-day MA
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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.