Airline stocks look like a decent buy, but with a non-traditional trading structure


Ssurprisingly enough, I feel sorry for the airlines right now. It should be hard to generate sympathy for an industry that in the not-too-distant past showed such disregard for shareholders, destroying their investments using bankruptcy as a bargaining tactic. That’s not even taking into account the remarkable disregard he shows his customers, nicking and dulling them in every way imaginable, even as the seats get smaller and tighter and the legroom shrinks.

Despite all this, it’s hard not to feel sorry for them because it seems that in recent years the airline industry really couldn’t stop.

First, there was the Covid. Understandably, people feared being locked in a metal tube with a group of strangers, and airline revenues plummeted. Then, just when things seemed to be looking up after the initial wave, multiple variants set us back, further delaying a return to normality. In February of this year, we seemed to have broken our backs on the pandemic, variants and all, but Russia chose that moment to launch a brutal invasion of Ukraine.

Obviously, there are far more serious ramifications than the impact on airlines, but as airspace has been closed and oil has soared, airline stocks have once again been hit hard. . The big three US international carriers, American (AAL), Delta (DAL) and United (UAL) all saw their shares drop 25-30% in one week.

If we’ve learned one thing from the pandemic recovery, it’s that people love to travel and will return as soon as they feel up to it, even if it comes with inconveniences like mask mandates and fewer flights. . When they do, it will quickly become apparent that airline stocks are grossly oversold. It’s not that the problems airlines are facing aren’t real, it’s just that they’re temporary.

Based on the level of resistance and determination shown by the Ukrainian people and the fact that Putin has retreated into a corner where it is difficult to foresee a saving outcome, the conflict in Ukraine does not seem likely to end anytime soon. so early . However, over time, the impact on airlines will fade. They will use routes for international flights that avoid the area and re-enter the flight, and oil has shown us many times that it is volatile back and forth and as sure as eggs are eggs, a big jump will follow a big drop at some point.

So, international airline stocks look like a good long-term buy. However, with the current level of volatility, we could still see them falling over the next few days or weeks. This translates into two questions for investors: what makes a good entry point and how can you mitigate risk if you buy?

In either case, the traditional way of structuring a profession is useless in the current circumstances. Normally, to arrive at an entry point for a stock, I would look at the chart, looking for support levels to trade just ahead or resistance levels, a break of which would be a signal to buy. Then, based on that entry point, I would set stops to avoid breaking through support or falling back below resistance. At present, however, with AAL, DAL and UAL having traded intraday ranges that are well over 10% of their price for two consecutive days, support and resistance levels are non-existent, and any stop close enough to being useful is in danger of being hit almost immediately.

The answer is to employ a tactic often used by investors: the cost averaging. The idea is to break down your total planned investment into parts and then invest each part separately at pre-set intervals, with time not price determining your entry point. That way, if the stock goes down after your first trade, you’re happy because you can buy it cheaper next time. On the other hand, if it goes up, you are still happy, because you bought it for cheap. Normally, for basic wallets, dollar costs are averaged over weeks or months, but for a trade like this, purchases can be made daily for a few days.

What averaging dollar costs in a volatile market allows you to do is get involved while things are flying, without immediately adding a massive amount of risk. What matters is not where each individual trade is made, but where your average price ends. Once this is determined you will have days of price data to determine stop loss levels and can take it from there.

Whether or not you adopt the above strategy, and whether or not you choose to buy airline stocks, there is one key thing to realize here: one of the most important things to stick to when it comes to trading and investment is flexibility. It’s all too easy to sell yourself on a “system” or trading style, but no successful trader ever uses just one signal or trading structure, regardless of what’s going on in the market. Unusual times call for unusual trades, and right now that means averaging even in single stock positions.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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