With the bulk of the holiday season over, many people are packing their bags, boarding planes, and heading home after visiting distant relatives. For its part, the airline sector put in a strong performance last year, with the AMEX Airline Index (AMEX: XAL, Stock Forum) gaining more than 33% in 2009. The index has had a strong run higher from its March low, with help from its 10-week and 20-week moving averages. In fact, since early April, the index has suffered only three weekly closes below these trend-lines.
Considering the sector's strength, it should come as no surprise that investors are relatively optimistic toward the components. The composite Schaeffer's put/call open interest ratio (SOIR) for the airline sector is lower than 98% of the readings taken during the past year, indicating that short-term options speculators have rarely been more optimistically aligned. Furthermore, 53% of the 530 analyst rankings of the airline companies come in at a "buy." However, there is still ample room for additional upgrades, which could lift the sector higher.
One attractive opportunity within the sector is UAL Corporation (NASDAQ: UAUA, Stock Forum). UAL's main subsidiary, United Airlines, is one of the world's leading passenger and cargo carriers, and also provides regional feeder service in the U.S. via United Express, operated by independent contractors. United serves more than 200 destinations in about 30 countries from hubs in Chicago, Denver, Los Angeles, San Francisco, and Washington, D.C., according to Hoover's. Its fleet includes about 460 mainline jets and 280 regional aircraft. United leads the Star Alliance, a marketing and code-sharing group that includes Continental and Lufthansa.
On Jan. 4, UAL reported that traffic remained flat in December, despite capacity falling 3.1%. The company also said that its December load factor was 81.9%. This news, combined with better-than-expected December results from Continental Airlines Inc. (NYSE: CAL, Stock Forum), provided the spark for a sharp rally in UAUA shares on Tuesday. In fact, the stock jumped nearly 8% to tag a fresh 52-week high and challenge former resistance near $14 per share. UAUA has not closed a session above the 14 level since Nov. 6, 2008.
Technically speaking, the equity has soared more than 348% since bottoming in late June. During this period, the shares have enjoyed the support of their 10-week and 20-week moving averages. However, UAUA has recently outpaced these trend-lines, bolstered by renewed support at its 10-day moving average. The security has not closed a session below its 10-day trend-line since Nov. 24.
Despite the equity's recent bout of technical strength, investors are extremely skeptical. The SOIR rests at 1.13, as put open interest outnumbers call open interest among options slated to expire in less than three months. This reading is also higher than 80% of all those taken during the past year. In other words, short-term options players have been more pessimistically aligned toward the shares only 20% of the time during the past 12 months.
The International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have also seen a rise in put trading. Specifically, UAUA's 10-day ISE/CBOE put/call volume ratio comes in at 0.91, as puts bought to open are nearly in parity with calls purchased during the prior two weeks. This ratio is higher than 78% of all those taken during the past year. These lofty readings indicate that pessimism is on the rise among speculators.
Furthermore, short sellers are adding to their bearish bets as they attempt to call a top to the stock's uptrend. During the past month, the number of UAUA shares sold short increased by 12% to 28 million. This accumulation of pessimistic positions accounts for nearly 17% of the company's total float. An unwinding of these shorted shares could fuel a significant rally for UAUA.
Disclosure: Joseph Hargett has no financial interest in any of the equities or products mentioned in this column.