There are two types of people in the investment game:
People who hate, despise and altogether loathe buying stocks that are already moving, and
People who will only buy stocks that are moving.
Only buy stocks that aren't moving if you can establish some historical reference point that puts the odds significantly in your favor, or
Only buy stocks that are moving, or breaking out.
This column is going to take care of both types, in turn.
Get on the Plane!
Standard & Poor's Airlines Index
as our proxy for the airline sector, the chart below shows the index is about as oversold as a group can get. I took a look at performance for the index going back to 1976 and measured the percentage spread between the index (using weekly closing prices) and its 40-week moving average.
Current data show that spread is a minus 16.8% (see chart below), slightly above the recent low of minus 21.4% for the week ending Sept. 24, 1999. In other words, the index is 16.8%
its 40-week moving average.
Source: Standard & Poor's, Arnhold and S. Bleichroeder
Some people might think it odd to use this as a momentum indicator, but I've found some comfort in it because I use the moving average as a fulcrum -- a lever above or below which the data series is likely to travel.
Generally, when an item strays too far above its moving average, upward momentum often slows; and when it moves too far below the moving average, its downward momentum often lessens. There is no guarantee that the item being measured will reverse direction, but if there is some historical significance for such a change, then I believe that's the way to bet.
Going back to 1976, the index recorded an oversold reading that was less than or equal to the September low numerous times: In 1980, 1982, 1984, 1987, three times in 1990, twice in both 1998 and 1999.
The historical results show that buying the Airlines Index at the time the spread was at least as wide as minus 21.4%, produced admirable results on both a 6-month and 12-month basis. (Note: In order to get a reliable read on historical results, I picked the date the percentage first appeared because in instances like 1980 and 1982, there were five consecutive weeks in which the index was at such depressed levels. The multiple results in 1990 and 1998 are because there were intervening weeks when the spread narrowed to less than minus 21.4%.)
Here are the results of this exercise:
Eight times out of nine, the Airlines Index moved higher six months after trading as low as minus 21.4% beneath its 40-week moving average. The average return in those instances was 24.7%. And the success ratio, at 89%, was quite high.
Nine times out of nine, the Airlines Index moved higher 12 months after trading as low as minus 21.4% beneath its 40-week moving average. The average return in those cases was 32.2%. The success ratio? 100%.
What I find convincing is that in addition to the oversold reading, the S&P Airlines Index encounters major support at the 420 level. This is just above the level from which it bounced in October 1998, and it also represents the breakout level in late 1997 as the index finally moved above the former all-time high from 1989.
There is no way that any of these individual stocks are bullish from a technical perspective. But come to think of it, they weren't bullish at any of the other times either. Some of them do have decent patterns, including
(which, for my money is
best U.S. airline),
This analysis jives with that of
Arnhold and S. Bleichroeder's
airline analysts, Tom Longman and Rob Milmore, who tell me the group is near the lower end of its valuation range using a price-to-EBIDTAR basis (earnings before interest, debt payments, taxes, amortization
aircraft leases, the latter being R). They also note that the group is selling at a forward price-to-earnings ratio of 7.5, which is a 70% discount to the
. Note: They rate both America West and Southwest a buy. (Arnhold and S. Bleichroeder has performed no investment banking for either company.)
And for Those Who Like Breakouts
"It don't mean a thing if it ain't got that swing."
must've been talking about breakout stocks! Here are three that would've made Mr. Waller very happy:
. There's bullish action here as the stock has broken out of a near two-month base in which it traded between 68 3/4 and 57 1/8. This base actually sat just above a prior base of five months in which the stock traded between 45 and 60. The breakout suggests a target just above 80.
. There is bullishness here, too, and it is in the same group as Flextronics. More bullish action here as Sanmina broke out of a near 6-month base in which the stock traded between 83 3/4 and 75 13/16. The breakout suggests a target of nearly 92.
. In mid-September, Unify (
Unifi) completed a 7 1/2-month base by gapping above resistance on a huge volume surge of 14 million shares -- 24 times the 10-day volume moving average. Since that time, the stock was base-building until last Friday, when it broke out of a 6-week trading range in which 27 9/16 was the high and 17 7/8 was the low. A reasonable target for Unify is 37.
John Roque is the technical analyst at Arnhold & S. Bleichroeder, a New York-based investment brokerage firm specializing in Europe and the U.S., and a frequent guest on CNBC. At time of publication, Roque had no position in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Roque appreciates your feedback at