For three weeks we have been talking about the & # 39; riddle & # 39; of the market in terms of inflation – whether rising inflation will help or hinder economic growth. The most recent version of the story, exacerbated by rising oil prices, says inflation could stand in the way of a substantial recovery as countries come out of lockdown thanks to vaccines.
We have disputed that conclusion, however, based on a more nuanced view of recent market activity. We recognized that even during a hiatus in the sell-off, investors continued to turn away from growth stocks such as big tech, which exploded in valuations during the pandemic, and instead moved into value sectors, which were under pressure during lockdowns and social constraints.
Yesterday we made a bearish call to the tech-heavy, the index that lists some of the most elite, mega-cap tech stocks. Today, we offer an optimistic view of a defeated travel stock, Southwest Airlines (NYSE :), whose fortune could be said to epitomize the current state of value stocks.
Unlike the broader market, which bottomed out in March and then recovered, Southwest only managed to rebound in May, after hitting its lowest level since January 2014. It goes without saying that if planes cannot find passengers, the company will not benefit. As such, the price only bounced back after finding support at the highs before the dotcom crash.
Shares have been climbing slowly since then, but are up 38% since the low. It is up a whopping 80% over the same period, more than double that of Southwest stocks. But while the reference index has fallen nearly 6% since its high on February 16, it is still up just over 3% so far this year. In comparison, LUV, which closed at $ 60.55 yesterday, its highest level since October 2018, is up just over 34% since the start of the year.
So, while the broader market is now in a downturn, Southwest is booming and has exhausted only half of the recovery movement against the broader market.
LUV Daily
The stock broke a falling flag upward, bullish after the 7.5% jump in just four days. That was an upward break from an earlier follow-up pattern, a pennant. Note how Friday's low found support with the breakout of the pennant.
The flag fell as investors took profits after the sudden, sharp gains. The flag evolved after the price had fallen through the downtrend line since the December 2017 record.
The bottom of the flag and the extremely low Friday, a powerful hammer, developed right on top of that long-term downward trend, showing a reversal of the supply / demand balance. The fact that the price has surpassed the record's downtrend line may encourage the bulls even more.
Trading Strategies
Conservative traders must wait for the price to retest the integrity of the flag.
Moderate traders would wait for a dip for better access, if not evidence of support.
Aggressive traders can go long at will, provided they understand and accept the added risk. They should only do this after they have a coherent trading plan that they are committed to following.
Here's just one example:
Trade Sample
Entry: $ 59
Stop Loss: $ 57
Risk: $ 2
Goal: $ 65
Reward: $ 6
Risk: Reward Ratio: 1: 3
