While the Summer Travel Rally is Over, a Bounce is Coming

Leading into summer, airline stocks were among the best performers.

But now the peak travel season is over.

And so is the airline rally – airline stocks have given up all the summer gains.

Investors should stay away. But for traders, it’s a different story.

I’ll explain why a short-term bounce looks imminent…

The NYSE Airline Index (XAL) contains big names like American Airlines (AAL), JetBlue Airways (JBLU), and Delta (DAL), amongst others.

Take a look at the rise, and subsequent fall, of XAL…

After flying sharply higher from May until July, the airline index has completed a round trip. It has given up the entire summertime rally.

The index is now deep in oversold territory.

The MACD momentum indicator at the bottom of the chart is more oversold than at any time since last October. And, it looks like the airline stocks are set up for a “dead-cat bounce.”

A dead-cat bounce is based on the premise that if you tossed something as worthless as a dead cat off the top of the Empire State Building, it would bounce when it hit the ground.

If we apply that theory to the stock market, then even the most worthless, piece of garbage stock is likely to bounce once it has hit bottom. Those bounces happen fast and they can produce large moves.

For example, Target (TGT) fell from $160 to $124 in early June and was so oversold it bounced $13 higher in just three days. There was no news to account for the rally. The stock had simply gotten so oversold that a bounce was inevitable.

Academy Sports and Outdoors (ASO) is another good example. The stock fell from $60 down to $50 in August. It got so oversold that it recovered more than half that loss in two days.

Shares of Fortinet (FTNT) also dropped hard in August, falling from $80 to about $57. The stock rallied 12% earlier this month.

None of these are fly-by-night companies, by the way. They’ve been around for a while but are just experiencing cyclical difficulties. And it may be a while before business is firing on all cylinders again.

So, it’s probably too early to look at these dead cats as intermediate- or long-term value trades.

Anyone interested in trading dead cats should only do so on a short-term basis.

Right now, the airline sector looks poised for a dead-cat bounce. If it plays out, the index could be 8% to 10% higher in the next few days.

But don’t overstay in the trade… Because dead cats will always bounce when they hit the ground. But when the bounce is over, they fall right back down again.

So, collect your profits when you have them, and get out.

Best regards and good trading,

Jeff Clark

Do you take advantage of dead-cat bounces?

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