Today’s Market Wrap Up and a Glimpse Into Friday

Stocks turned lower on the heels of a record session for the S&P 500 and Nasdaq. Today the Dow Jones Industrial Average fell nearly 200 points while the S&P 500 and tech-heavy Nasdaq each fell about 0.6%.

The mood on Wall Street went south after a development out of Kabul in which U.S. troops and Afghans were killed in an explosion at the airport. Investors are also watching and waiting for Federal Reserve Chairman Jerome Powell to tip his hand on economic stimulus and inflation at the Jackson Hole symposium on Friday.

Stock index futures flipped green in extended-hours trading. The Dow, S&P 500 and Nasdaq all reclaimed some ground ahead of Friday’s session with all eyes on Jackson Hole.

Stocks to Watch

  • Shares of apparel retailer The Gap are rallying 6% in after-hours trading on better-than-expected quarterly results. Sales rose to more than USD 4 billion and The Gap also raised its full-year earnings outlook despite supply chain issues, the threat of the delta variant and inflation risks.
  • Southwest Airlines is trading lower after the company announced it would be slashing the number of flights starting next month. The company is changing its schedule in response to backlash from staff who were spread too thin. Southwest had already been suffering from weaker demand as a result of a spike in COVID cases.
  • Shares of meme stock AMC Entertainment tumbled 8% on the day. Shares were starting to recover with modest gains in the after-hours market and no clear catalyst either way.
  • Shares of U.S. automaker Ford fell 2% seemingly in response to chip problems that continue to plague the industry.
  • A technical glitch allowed FBI agents to view secret evidence data using Palantir Technologies software that they would otherwise not have been permitted to see.  On social media, users were quick to defend Palantir and blame the agents. Shares of Palantir gained 2% on the day.

Look Ahead

The Federal Reserve’s Jackson Hole meeting is in focus in anticipation of chairman Powell’s speech. The theme of this year’s symposium, which will take place virtually, is “Macroeconomic Policy in an Uneven Economy.”

Despite Thursday’s declines, the three major stock market indices are poised to finish the month of August with gains.

Southwest Airlines Lowers Q3 Revenue Guidance

Southwest Airlines Co. (LUV) is trading lower on Wednesday after warning about Q3 2021 revenue due to “close-in’ cancellations and bookings as a result of the Delta variant. The news is bearish for the broader airline industry, for two reasons. First, it tells us that leisure travelers are having second thoughts about vacations and trips to see grandma while second, it defies predictions that widespread business travel would resume in the fourth quarter.

Red Flag for Airline Industry

The airline has outperformed its peers since March 2020, with a domestically-focused schedule avoiding the gauntlet of international travel restrictions. The recovery wave reached the 2018 peak in March 2021 before reversing, unlike American Airlines Group Inc. (AAL), United Airlines Holdings Inc. (UAL), and Delta Air Lines Inc. (DAL), which stalled well below similar levels. In turn, this raises odds that rivals will follow with identical warnings in coming weeks.

According to the release, Southwest “recently experienced a deceleration in close-in bookings and an increase in close-in trip cancellations in August 2021, which are believed to be driven by the recent rise in COVID-19 cases associated with the Delta variant. Based on the assumption that COVID-19 cases remain elevated in the near-term and current revenue trends in August continue into September, the current outlook for Q3 2021 operating revenues has worsened by an estimated three to four points.”

Wall Street Asleep at the Wheel

Wall Street consensus has ignored the Delta variant, with a ‘Buy’ rating based upon 16 ‘Buy’, 3 ‘Overweight’, and 4 ‘Hold’ recommendations. No analysts are recommending that shareholders reduce positions or move to the sidelines. Price targets range from a low of $57 to a Street-high $85 while the stock is set to open Wednesday’s session about $7 below the low target. This disconnect indicates that Main Street understands the current risks better than the analyst community.

Southwest posted an all-time high at 66.99 in December 2017 and entered a trading range that broke to the downside in February 2020, dropping the stock to a 6-year low. The subsequent uptick stalled within three points of that peak in April 2021, giving way to a correction that pieced the 200-day moving average in the 50s in July. Two tests at that level have failed while this morning’s decline is holding within a short-term trading range. Accumulation has dropped to a 52-week low, raising odds for continued downside into the lower 40s.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Stalling Signs? Taking a Look Under the Hood of US Equities

Greetings. I hope this article finds you and yours well. Today, we are taking a look at some additional market indicators and internals to get an unbiased perspective on things.

First, I want to preface things by mentioning that I am not suggesting that I am fully bearish on the S&P 500 or stocks right now. However, I am taking more of a cautious stance at the moment.


Figure 1 – S&P 500 Index April 15, 2021 – July 21, 2021, Daily Candles Source

Nothing new to see here. Just another pedestrian pullback to the 50-day SMA and a bounce back. This pattern has repeated itself several times since the pandemic lows in the $SPX. It won’t repeat itself forever – that would be too easy.

Since it is earnings season, let’s talk earnings multiples.

Feeling bullish? It can be challenging to get excited about an $SPX at 4400 with an estimated 46.40 P/E ratio (trailing twelve months). We are in the middle of earnings season, so we will have a clearer figure soon.

Figure 2 – S&P 500 PE Ratio 1870 – July 22, 2021. Source

Stocks are not cheap by any measure, folks. However, with easy monetary policy and low rates, this is to be expected. What could be the catalyst to derail this freight train?

How about the Dow Transports? This index used to be talked about much more frequently and is followed closely by students of Dow Theory. We just don’t hear much analysis about it on Fox Business, CNBC, or Bloomberg these days.

The Dow Transports (Dow Jones Transportation Average) $TRAN is an index comprised of 20 companies.

Here are the index components and weighting as of December 2020:

Alaska Air Group, Inc. 2.55%

American Airlines Group Inc. 0.76%

Avis Budget Group, Inc. 1.80%

C.H. Robinson Worldwide, Inc. 4.61%

CSX Corporation 4.39%

Delta Air Lines, Inc. 1.94%

Expeditors International of Washington, Inc. 4.61%

FedEx Corporation 13.10%

J.B. Hunt Transport Services, Inc. 6.70%

JetBlue Airways Corporation 0.70%

Kansas City Southern 9.73%

Kirby Corporation 2.51%

Landstar System, Inc. 6.60%

Matson, Inc. 2.79%

Norfolk Southern Corporation 11.42%

Ryder System, Inc. 3.12%

Southwest Airlines Co. 2.26%

Union Pacific Corporation 9.91%

United Airlines Holdings, Inc. 2.11%

United Parcel Service, Inc. 8.39%

Figure 3- Dow Jones Transportation Index January 4, 2021 – July 21, 2021, Daily Candles Source

Here, and in contrast to the Dow Jones Industrial Average, we can see that the Transports topped back on May 10, 2021. Proponents of Dow Theory would argue that this creates a lack of confirmation and that the subsequent highs in the Dow Jones Industrial Average are not valid due to this lack of confirmation.

What could be the reason for the stall in the Transports? Input Costs? While fuel costs have risen, what about the rise in retail spending? Is the stimulus-powered consumer pocket not enough to counterbalance the rising input costs?

If input costs are the reason for the stalling, what about the other companies that rely on raw materials to make their products? Recent inflationary data has not affected these companies’ stock prices yet (for the most part).

What if the Fed eases off the gas pedal?

While it is very difficult (if not impossible) to pick market tops (and I don’t advocate trying to do that), it is wise to look at certain market indicators to get an understanding of what is going on beneath the surface.

It is easy to look at the chart of the $SPX and see that it is moving higher, from the bottom left-hand corner of the chart to the top right-hand corner. However, that does not tell the whole story of what is happening in the US equity markets.

We will be monitoring the above and previously mentioned market internals and indicators for more clues in the coming days, weeks, and months. I think it is critical to be aware of metrics such as the above as the broader indices trade near all-time highs.

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For a look at all of today’s economic events, check out our economic calendar.

Rafael Zorabedian
Stock Trading Strategist

Sunshine Profits: Effective Investment through Diligence & Care

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Earnings vs Inflation – What Is The Right Bet?

As investment money will always be looking for a place to roost many stocks still look like the best opportunity for alpha, especially some of your bigger high-tech companies like Microsoft, Google, Facebook, etc… who don’t face the same headwinds created by supply chain dislocations, higher commodity prices, etc.

Fundamental analysis

Bulls are hoping to see more money lured into the market by strong Q2 earnings which have so far failed to ignite a meaningful rally. Analyst expectations for S&P 500 company earnings is still around +65%, something stock bears argue is lofty considering the extreme level of supply chain dislocations and labor shortages.

There is also a lot of debate about whether corporate profit gains are “peaking” in the face of slower growth in the quarters ahead as the reopening boom begins to fade. Remember, investors place bets on the future, not what happened last quarter.

The earnings pace really picks up next week with highlights including IBM on Monday; Chipotle and Netflix on Tuesday; ASML, CocaCola, Novartis, and Verizon on Wednesday; Abbott Labs, AT&T, Biogen, Capital One, Dow Inc., Intel, Snap, Southwest Airlines, Twitter, and Union Pacific on Thursday; and American Express, Honeywell, and Nextera on Friday.


One of the biggest factors that seem to be weighing on investor sentiment continues to be inflation. The latest indication of rising costs was reflected last week in U.S. Import Prices, which climbed for an eighth straight month in June.

However, the year-on-year increase slid to +11.2%, down from +11.6% in May is an encouraging sign that some inflationary pressures might be starting to ease. Federal Reserve Chairman Jerome Powell, testifying before the Senate Banking Committee yesterday, repeated the script he’s stuck with for months, saying inflation will likely remain elevated in the coming weeks and months before moderating.

Powell also told lawmakers that the Fed is not in a hurry to start paring its monthly asset purchases but he stressed that the central bank is prepared to adjust policy if they see signs of inflation moving “materially and persistently beyond levels consistent with our goal.” Wall Street increasingly expects the Fed to start trimming asset purchases later this year and even start lifting rates as soon as Q4 2022.

The Fed meets next on July 27-28 but most analysts think Powell will wait to make any big policy change announcements at either the annual Jackson Hole symposium at the end of August or possibly the FOMC’s September policy meeting. Central banks in Canada and New Zealand this week scaled back their asset purchase schemes which some worry could start to put pressure on central bankers in other developed countries to also tighten.

The European Central Bank releases its latest policy decision next Thursday. Bulls still largely believe that U.S. growth will be able to outpace “transitory” inflation pressures but the outlook for some companies could dim if the Fed starts reining in its “easy money” policies sooner than investors have been anticipating.

sp500 analysis forecast 18 july 2020

SP500 technical analysis

SP500 pulled back last week after another attempt to break out. There is no surprise we see such choppiness in the middle of summer. Moreover, very likely this price activity will stay for a few more weeks. We are still in a bull market. However, the risk of deep pullback is rising. If that happens, SP500 will target to close the gap near 4000.

On the other hand, if the price sustains above Gann resistance 4400, bulls will target 4500 at least. Two of my favourite indicators are giving opposite signals now. So, I don’t have any strong bias at the moment. Advance Decline Line remains bearish. At the same time, Insider Accumulation is bullish. In general, swing traders have to focus on daily support and resistance. Likely it will take few more weeks to see a real direction. Short-term traders can use Gann levels and Cycles on 4h charts to find trading opportunities.

Southwest Airlines Ceo Gary Kelly to Step Down

Kelly, 66, who became the CEO in 2004, has led Southwest through some of the airline industry’s most turbulent times including the coronavirus crisis that hammered travel demand.

As CEO, he spearheaded several initiatives, including the acquisition of AirTran Airways, the launch of international destinations for the first time in Southwest’s history, and the introduction of the Boeing 737 MAX 8 into the airline’s fleet, the company said.

Jordan, 60, joined the airline in 1988, and has served in roles including director of revenue accounting and corporate controller, among others. He will take charge effective Feb. 1, 2022.

Southwest’s shares fell about 1% in early trading. The stock has more than tripled in value during Kelly’s tenure.

(Reporting by Ankit Ajmera in Bengaluru; Editing by Sriraj Kalluvila)

Frontier CEO Says Now Making Money with Low Fares in Pandemic as Stock Debuts

By Tracy Rucinski

The airline started generating positive cash flow at the beginning of March, a key milestone for an industry that has been burning money after drastically scaling back flights last year as demand tanked.

Frontier is now benefiting from a recovery driven by domestic leisure travel, its specialty, flying more capacity this March than in the same month of 2019.

“Coming out of this, we’re in the best position we believe of anyone in the space given our concentration in the domestic leisure business and our ability to make money with low fares,” Biffle said in a virtual interview from New York.

The airline, owned by private equity firm Indigo Partners, whose managing partner is no-frills tycoon Bill Franke, is seeking to raise around $600 million from its initial public offering, its second attempt to go public.

Frontier on Wednesday priced its initial public offering of 30 million shares at $19 per share, the low end of its marketed range of $19-$21, likely underscoring the risks involved as the airline industry pulls out of its worst crisis.

Airline investments have been notoriously volatile in the past. The head of planemaker Boeing Co said on Wednesday the pace of vaccinations hold the key to the industry’s recovery to prior levels.

Environmental groups have called into question the industry’s plans for reducing emissions and say cheap fares such as those practiced by ultra-low-cost carriers over-stimulate the demand for air travel and contribute to global warming.

Frontier, now valued at about $4 billion, is offering 15 million shares, and will receive net proceeds of about $266 million, the carrier said.

It will use the proceeds, half going onto its balance sheet and half to Indigo and other selling shareholders, to fund growth and manage debt, including repaying some of the $150 million in government loans from a COVID-19 relief package.

That will help restore its balance sheet to near pre-pandemic levels and allow it to continue growing by 10% to 15% a year, Chief Financial Officer Jimmy Dempsey said.

The listing follows a stellar debut by Apollo Global Management-backed Sun Country Airlines last month.

Like other U.S. budget carriers, Frontier took on less debt and had a lower cash burn than large legacy airlines, creating a better financial position for a recovery that Biffle said is coming fast.

Frontier, with $1.25 billion of revenue in 2020, is targeting growth from all of its key U.S. cities beyond its home base Denver, where it has roughly 100 non-stop flights, including popular Florida destinations such as Orlando and Miami. It plans to open Tampa and Atlanta routes later this year.

The airline averted employee furloughs during the pandemic and was among the first to announce pilot and flight attendant hires. It expects to hire roughly 700 employees this year as it receives six new aircraft.

It hires roughly 100 employees per airplane, including mechanics and ground staff, the executives said.

Frontier has 156 aircraft on order with Airbus SE and the new jets will feature lighter-weight seats debuted last week to cut its fuel burn.

The airline generates 43% fuel savings compared with other U.S. airlines, making it the most fuel-efficient U.S. carrier, according to a Frontier statement last week.

“We live in Colorado,” Biffle said, adding: “ESG is real.”

(Reporting by Tracy Rucinski, Editing by Sherry Jacob-Phillips)

S&P 500 Subdued as Focus Turns to Fed

By Shashank Nayar and Medha Singh

Delta Air Lines, Southwest Airlines and JetBlue Airways said leisure bookings are rising and offered some of the first concrete signs that the worst may be over for the airline industry.

The S&P 1500 airlines index jumped about 3.8% to a one-year high, while planemaker Boeing Co added about 2%.

Other travel-related stocks including Carnival Corp, Wynn Resorts and MGM Resorts gained between 3% and 5%.

Wall Street’s main indexes on Friday logged their best week in six as approval of a $1.9 trillion relief package and mass vaccinations fueled demand for economy-linked stocks such as banks, energy, materials at the cost of high-growth tech names.

The major U.S. stock indexes were roiled in recent weeks as a spike in longer-dated U.S. bond yields due to fears of an increase in inflation and, in response, a tapering of the Fed’s easy monetary policy worried investors.

“The U.S. economy looks in a better shape than most other developed economies,” said Hussein Sayed, chief market strategist at FXTM.

“Despite the rosier economic outlook, this week’s Fed meeting is expected to be absent of major policy changes.”

At the end of Fed’s two-day meeting on Wednesday, policymakers are expected to forecast that the U.S. economy will grow in 2021 at the fastest rate in decades while reiterating their dovish stance for the foreseeable future.

The yields on benchmark 10-year Treasuries hovered near their 13-month high at 1.61%, slightly lower than its peak of 1.64% hit on Friday.

At 9:47 a.m. ET, the Dow Jones Industrial Average rose 87.51 points, or 0.27%, to 32,866.15, the S&P 500 gained 0.29 points, or 0.01%, to 3,943.63 and the Nasdaq Composite lost 6.81 points, or 0.05%, to 13,313.11.

Five of the major S&P sectors were lower, with financials and energy leading losses.

Tesla Inc added “Technoking of Tesla” to billionaire Chief Executive Elon Musk’s list of official titles in a formal regulatory filing that also named finance chief Zachary Kirkhorn “Master of Coin”. Tesla’s shares were nearly flat.

Eli Lilly and Co shares slumped about 8.5% after “mixed” results from the drugmaker’s mid-stage trial testing its experimental drug to treat Alzheimer’s cast a doubt on the chances for the drug’s accelerated approval, according to analysts.

Advancing issues outnumbered decliners by a 1.2-to-1 ratio on the NYSE and a 1-to-1 ratio on the Nasdaq.

The S&P 500 posted 59 new 52-week highs and no new low, while the Nasdaq recorded 239 new highs and six new lows.

(Reporting by Shashank Nayar and Medha Singh in Bengaluru; Editing by Maju Samuel)

Boeing In Retreat After Engine Failure

Dow component Boeing Co. (BA) is trading lower by more than 8% in Monday’s pre-market after a 777 jet blew an engine and dropped debris on a Denver neighborhood. The jet landed safely after the incident, prompting the carrier to remove the planes from service.  The Federal Aviation Administration has ordered inspections on all aircraft with similar Pratt & Whitney engines manufactured by Raytheon Technologies Corp (RTX), who also fell after the news.

Boeing Takes Quick Action

Boeing acted quickly, telling other airlines flying the Pratt-equipped 777 to also ground their fleets. The United States and Japan had 128 of those jets in service at the time of the incident. The quick response contrasted sharply with the 2019 Ethiopian 737-MAX crash when former CEO Dennis Muilenberg initially refused to ground the airplanes and called former President Trump to stop the FAA from taking action.

The news could impact investor sentiment and passenger confidence following the recertification of the MAX in the fourth quarter of 2020. Southwest Airlines Co. (LUV) just announced the troubled jetliner would be back in service on Mar. 11 while Boeing recently reported modest improvement in its January order and delivery update, raising hopes the aerospace giant was finally putting the crash and the pandemic behind them.

Wall Street and Technical Outlook

Wall Street consensus stood at a ‘Hold’ rating ahead of the news, based upon 9 ‘Buy’ and 8 ‘Hold’ recommendations. More importantly, four analysts recommend shareholders close positions and move to the sidelines, despite the MAX recertification. Price targets currently range from a low of $165 to a Street-high $307 while the stock is set to open Monday’s session nearly $25 below the median $235 target. It’s hard to gauge what impact the weekend events will have on ratings.

The stock carved a massive double top pattern between 2018 and February 2020, with support at 292. It broke down on heavy volume during the pandemic decline, hitting a 7-year low at 89.00. A three-legged recovery stalled below the Mar. 9 continuation gap in December, which has narrowly aligned with shallow Fibonacci retracement levels.  It’s currently trading below the 200-week moving average, oscillating across the 50-week moving average, indicating the secular downtrend remains fully intact.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

Southwest Airlines Expects Slower Cash Burn as Leisure Bookings and Demand Improves, Shares Gain

Southwest Airlines, the world’s largest low-cost carrier, forecasts cash burn to be less than previously thought, primarily driven by an improvement in leisure passenger demand and bookings, sending its shares up about 2% in pre-market trading on Tuesday.

The U.S. low-cost carrier said its average core cash burn was about $15 million per day in January 2021 and forecasts average core cash burn to be nearly $15 million per day in the first quarter of 2021, down from previous guidance of about $17 million per day.

Following this, Southwest Airlines‘ shares, which slumped about 14% in 2020, had risen over 10% so far this year. The stock rose 1.29% to $52 in pre-market trading on Tuesday.

However, the company remains cautious in this uncertain demand environment and continues to plan for multiple scenarios for its fleet and capacity plans. Southwest Airlines continues to experience significant year-over-year negative impacts to passenger demand and bookings due to the COVID-19 pandemic.

Southwest Airlines Stock Price Forecast

Twelve analysts who offered stock ratings for Southwest Airlines in the last three months forecast the average price in 12 months of $56.73 with a high forecast of $65.00 and a low forecast of $50.00.

The average price target represents a 10.50% increase from the last price of $51.34. From those 12 analysts, eight rated “Buy”, three rated “Hold”, one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $59 with a high of $90 under a bull scenario and 29 under the worst-case scenario. The firm gave an “Overweight” rating on the passenger airline company’s stock.

Several other analysts have also upgraded the stock outlook. Citigroup raised the price target to $51 from $50. Southwest Airlines had its price objective lifted by Credit Suisse Group to $62 from $51. They currently have an outperform rating on the airline’s stock. Cowen lifted their price target to $55 from $46 and gave the stock an outperform rating.

In addition, Sanford C. Bernstein upgraded to an outperform rating from a market perform and set a $59.00 price objective. BNP Paribas issued an outperform rating and a $55.00 target price.

Analyst Comments

“Why Overweight? Southwest Airlines (LUV) is arguably the highest quality airline in the US with a good balance sheet and high margins. As a largely US domestic medium-haul airline, we believe its network is in a sweet spot for a COVID-19 rebound and it has one of the attractive loyalty programs with a loyal customer base,” said Ravi Shanker, equity analyst at Morgan Stanley.

“All of these make LUV the most resilient at the bottom and well-positioned for a recovery, especially being able to capitalize on share gain or M&A opportunities as other Airlines falter/lag.”

Check out FX Empire’s earnings calendar

3 Airline Stocks Ready for Takeoff

Coronavirus-induced stay-at-home orders and border closures have wreaked havoc on the airline industry in 2020. Furthermore, a move to remote working during the pandemic threatens to significantly reduce corporate travel moving forward. Philanthropist and Microsoft co-founder Bill Gates recently said he expects business travel to disappear by over 50% longer-term. “My prediction would be that over 50% of business travel and over 30% of days in the office will go away,” Gates told the New York Times’ Dealbook conference, per CNBC.

However, over the past month, airline stocks have flown back into favor with investors after successful COVID-19 vaccine breakthroughs give hope that pre-pandemic travel levels may return as more people take to the skies. Below, we take a look at the three largest airline stocks by market capitalization.

Southwest Airlines Co. (LUV)

The Dallas-based low-cost carrier operates over 700 aircraft in an all-Boeing 737 fleet, primarily targeting leisure and independent small business customers. Although the Federal Aviation Administration (FAA) lifted its 20-month ban of the troubled Boeing 737 Max from flying passengers Wednesday, Southwest said the jet wouldn’t re-enter service until later next year. From a technical standpoint, the share price broke out above a nine-month downtrend line that may see it retest its pre-pandemic high at $58.83. The airline has a market cap of $27.35 billion.

Delta Air Lines, Inc. (DAL)

With a market cap of $25.67 billion, Delta flies to over 300 destinations in more than 50 countries. The company announced in September that it plans to borrow $6.5 billion, backed by its frequent-flyer loyalty program to secure liquidity to ride out the tail end of the pandemic.

More recently, the full-service airline canceled one in every five flights it was scheduled to operate on Thanksgiving Day amid crew shortages brought about by the health crisis. Turning to the charts, a recent cross of the 50-day SMA back above the 200-day SMA and breakout above a multi-month downtrend line may lead to further gains toward crucial overhead resistance at $51.

United Airlines Holdings, Inc. (UAL)

United Airlines operates as a full-service carrier through its strategically located hubs in San Francisco, Chicago, Houston, Denver, Los Angeles, New York/Newark, and Washington, D.C. Last month, Raymond James’ airline analyst Savanthi Syth upgraded the airline’s stock to ‘Outperform’ from ‘Market Perform’ and reiterated the firm’s $60 price target.

Syth argues the company sits in a better position than its competitors for a travel revival after securing a pilot agreement through 2022. He also noted that United has no pending fleet retirements, allowing it to rapidly increase capacity when demand picks up. Moving on to the chart, a comprehensive breakout above a crucial downtrend line and the 200-day SMA could see the shares take flight to the January swing low at $74.34. The airline has a market value of $13.18 billion.

For a look at today’s earnings schedule, check out our earnings calendar.

Southwest Airlines Shares Drop About 3% as Rising COVID-19 Cases Stall Revenue Improvement

Southwest Airlines, the world’s largest low-cost carrier, said modest improvements in passenger demand and bookings seen in the past few months were fading due to recent surge in COVID-19 cases, sending its shares down about 3% in pre-market trading.

The U.S. low-cost carrier forecasts its fourth-quarter 2020 capacity to decline about 40% year-over-year. Southwest Airlines recently adjusted its January 2021 published flight schedule, and currently estimates its January 2021 capacity to dip in the range of 35% to 40% year-over-year.

“While the Company expected the election to impact trends, it is unclear whether the softness in booking trends is also a direct result of the recent rise in COVID-19 cases. As such, the Company remains cautious in this uncertain revenue environment,” Southwest added.

Southwest Airlines shares fell about 3% to $41.98 in pre-market trading on Thursday; the stock is down about 20% so far this year.

Southwest Airlines Stock Price Forecast

Thirteen equity analysts forecast the average price in 12 months at $47.40 with a high forecast of $59.00 and a low forecast of $40.00. The average price target represents a 9.67% increase from the last price of $43.22. From those 13 analysts, nine rated “Buy”, three rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $59 with a high of $90 under a bull-case scenario and $29 under the worst-case scenario. The firm currently has an “Underweight” rating on the world’s largest low-cost carrier’s stock. Southwest Airlines had its price objective increased by UBS Group to $52 from $48.

Several other analysts have also recently commented on the stock. Bernstein raised their price target to $44 from $29. Barclays increased their target price on shares of Southwest Airlines to $40 from $35. Wolfe Research cut shares to a peer perform rating from an outperform. Citigroup cut their price target to $36 from $38 and set a neutral rating.

Analyst Comments

“Southwest Airlines (LUV) is arguably the highest quality airline in the U.S. with a good balance sheet and high margins. As a largely US domestic medium-haul airline, we believe its network is in a sweet spot for a COVID rebound and it has one of the attractive loyalty programs with a loyal customer base,” said Ravi Shanker, equity analyst at Morgan Stanley.

“All of these make LUV the most resilient at the bottom and well-positioned for a recovery, especially being able to capitalize on share gain or M&A opportunities as other Airlines falter/lag.”

Upside and Downside Risks

Risks to Upside: 1) COVID Vaccine timing. 2) Industry Consolidation. 3) Industry Rationalization & Fare Stability – highlighted by Morgan Stanley.

Risks to Downside: 1) COVID Second Wave. 2) Alliance/Partnership Disruption/Breakage.

Check out FX Empire’s earnings calendar

Southwest Airlines Flies Above Resistance After Lifting September Load Factor

Southwest Airlines Co. (LUV) shares rose 3.67% Wednesday after the low-cost carrier raised its September Load factor and flagged that its cash burn in the third quarter will be lower than expected.

The Dallas-based airline lifted its load factor this month to between 45- to 50% from its previous forecast of 40- to 50%. Looking further ahead, it sees the metric ranging between 45- and 55% in October. On the revenue front, Southwest reaffirmed its expectation of a top-line contraction of 65- to 70% in September and expects October revenue to fall 65- to 75%. While operating revenue declined 70% in August, the figure came in 5% better than expected.

The airline, easily recognized by its Disney-themed livery on selected jets, said summer leisure demand trends have so far continued into the early fall. Moreover, the company expects its third-quarter (Q3) cash burn to slow to $17 million a day, less than its earlier forecast of $20 million per day.

Through Wednesday’s close, Southwest stock has a market capitalization of $24.83 billion and trades 21.67% lower on the year. However, performance has taken off over the past three months, with the shares gaining around 15% as of Sept. 17, 2020.

Shrinking Capacity

Southwest expects Q3 capacity to decline by 30- to -35%, followed by a fall of between 35- and 40% in November due to its decision to leave middle seats unbooked on flights through Nov. 30 as part of its ongoing social distancing protocols during the pandemic. “As we transition into autumn and the upcoming Thanksgiving holiday season, we want Southwest customers to have the confidence of knowing that middle seats will remain open through Nov. 30 to accommodate their fall travel plans,” said vice president Ryan Green, per USA Today.

Wall Street View

Sell-side analysts remain overwhelmingly bullish on the stock, impressed by the airline’s ability to attract holiday travelers amid a sharp slump in corporate demand. It receives 13 ‘Buy’ ratings and 8 ‘Hold’ ratings. No research firm currently recommends selling the shares. Twelve-month price targets range from as high as $54 to as low as $29, with an average consensus at $43.31. This indicates a modest upside gain of nearly 3% from Wednesday’s $42.10 close.

Technical Outlook and Trading Tactics

Southwest shares climbed to a five-month high Wednesday, closing comfortably above the 200-day simple moving average (SMA) on above-average volume. Given that the relative strength index (RSI) has recently moved into overbought levels, the stock may consolidate over the short-term before trying to push higher. Those who buy here should look to book profits near $48, where the price is likely to find overhead resistance from the August 2019 swing low. Protect capital by placing a stop-loss order somewhere beneath the 200-day SMA.