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 stockcharts.com

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 multpl.com

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 stockcharts.com

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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This content is for informational and analytical purposes only. All essays, research, and information found above represent analyses and opinions of Rafael Zorabedian, and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. You should not construe any such information or other material as investment, financial, or other advice. Nothing contained in this article constitutes a recommendation, endorsement to buy or sell any security or futures contract. Any references to any particular securities or futures contracts are for example and informational purposes only. Seek a licensed professional for investment advice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Information is from sources believed to be reliable; but its accuracy, completeness, and interpretation are not guaranteed. Although the information provided above is based on careful research and sources that are believed to be accurate, Rafael Zorabedian, and his associates do not guarantee the accuracy or thoroughness of the data or information reported. Mr. Zorabedian is not a Registered Investment Advisor. By reading Rafael Zorabedian’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Trading, including technical trading, is speculative and high-risk. There is a substantial risk of loss involved in trading, and it is not suitable for everyone. Futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment when trading futures, foreign currencies, margined securities, shorting securities, and trading options. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Rafael Zorabedian, Sunshine Profits’ employees, affiliates, as well as members of their families may have a short or long position in any securities, futures contracts, options or other financial instruments including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice. Past performance is not indicative of future results. There is a risk of loss in trading.

Airline Bosses Call on Uk and U.s. To Lift Trans-Atlantic Travel Restrictions

After more than a year of restrictions, the CEOs of American Airlines, IAG unit British Airways, Delta Air Lines, United Airlines and JetBlue Airways Corp said high vaccination rates in both countries meant travel could restart safely.

The push for reopening trans-Atlantic routes on Monday comes ahead of meetings between U.S. President Joe Biden and British Prime Minister Boris Johnson at the G7 meeting of advanced economies later this week in Cornwall, southwest England, this week.

The pair must use those meetings to agree to restart travel, British Airways chief executive Sean Doyle said in a statement ahead of an online press conference.

“We urgently need them to look to the science and base their judgements on a proper risk analysis, allowing us all to benefit from the protection offered by our successful vaccine rollouts,” Doyle said.

Since March 2020, the United States has barred nearly all non-U.S. citizens who have been in the United Kingdom within the previous 14 days from entering the country. Most U.S. travellers visiting the United Kingdom must quarantine for 10 days upon arrival.

The need for a reopening is much stronger for Britain-based airlines British Airways and Virgin Atlantic which are not benefiting from a rebounding domestic market like their U.S. peers.

(Reporting by Sarah Young in London and David Shepardson in Washington; editing by Michael Holden)

JetBlue Forecasts Revenue to Plunge 70% in Q4 as Fresh Spike in COVID-19 Cases Hurts

JetBlue Airways, a major American low-cost airline, forecasts revenue to plunge 70% y/y in the fourth quarter, worse compared to a previous prediction of nearly 65% y/y decline, and expects cash burn to surge to around $8 million per day as a resurgence in COVID-19 cases hammered air travel demand.

The passenger carrier said given the recent booking trends and the delay in receipt of cash tax refunds of nearly $70 million originally anticipated during the fourth quarter, the company now expects its average daily cash burn in the fourth quarter to be in a range of $6 million and $8 million, compared to its prior expectation of a range between $4 million and $6 million.

Booking trends remain volatile and the company continues to believe demand and revenue recovery will be non-linear through the fourth quarter and beyond, JetBlue added.

JetBlue Airways’ shares were down about 16% so far this year, traded nearly flat in pre-market trading on Monday.

JetBlue Airways Stock Price Forecast

Ten equity analysts forecast the average price in 12 months at $13.50 with a high forecast of $17.00 and a low forecast of $12.00. The average price target represents a -14.29% decrease from the last price of $15.75. From those ten analysts, three rated “Buy”, six rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $16 with a high of $29 under a bull-case scenario and $6 under the worst-case scenario. The firm currently has an “Overweight” rating on the ratings company’s stock.

Several other analysts have also upgraded their stock outlook. Stifel raised their price target to $13 from $12. Cowen and Company upped their target price to $13 from $10. Credit Suisse increased the target price to $12 from $11. JP Morgan lowered the target price to $16 from $17. UBS raised the target price to $13 from $9.

Analyst Comments

“We like JetBlue’s significant exposure to the “Medium Haul” U.S. domestic market, which we believe is likely to be the first to return (with short-haul challenged by driving and long-haul more challenged by international regulations). Additionally, JBLU’s “snowbird” network provides significant upside as leisure travel returns,” said Ravi Shanker, equity analyst at Morgan Stanley.

“We use a 10-year DCF assuming a 6.8% WACC and terminal cash flow perpetual growth rate of 2%. Our DCF valuation implies a 2023 EV/EBITDAR multiple of 6.1x, which is in line with LUV’s historical average given the “best in class” operating model,” Shanker added.

Upside and Downside Risks

Risks to Upside: 1) COVID-19 vaccine timing. 2) Leisure market recovery for point to point network. 3) Industry rationalization and fare stability – highlighted by Morgan Stanley.

Risks to Downside: 1) COVID-19 the second wave. 2) Better improvement in international travel vs. domestic.

JetBlue Airways’ Q3 Revenue Slumps 76% as COVID-19 Pandemic Slams Air Travel Demand

JetBlue Airways, a major American low-cost airline, reported that its revenue slumped 76% year-over-year as the COVID-19 pandemic affected air travel demand but the seventh-largest airline in the United States by passengers carried expects the booking to increase over the coming December holidays.

The passenger carrier company reported a net loss of $393 million or $1.44 in the third quarter of 2020, worst compared to a $187 million profit same period a year ago. Adjusted loss per share was $1.75 in the third quarter of 2020 versus adjusted diluted earnings per share of $0.59 in the third quarter of 2019.

“JetBlue reported 3Q20 adjusted loss slightly better than our and the consensus estimate. The company is seeing modestly improving revenue and demand trends in 4Q20 driven by momentum in leisure and VFR demand,” said Helane Becker, equity analyst at Cowen and Company, who gave a price target of $10.

“JetBlue and Airbus agreed to reshape the order book for deliveries previously expected in 2021 / 2022, which will limit cash out the door until CF b/e can be achieved.”

The company forecasts its revenue to decline 65% in the last quarter of this year and said they have negotiated an agreement with Airbus to defer additional aircraft and associated capital expenditure over the next few years.

JetBlue Airways’ share price was down 6.5% on Monday. The company traded as low as $12.40 and last traded at $12.56.

Executives’ Comments

“Our efforts to raise liquidity, reshape our network, and reduce costs, are bearing fruit, and have helped us navigate the immediate crisis. We are confident that our low-cost, low fare leisure model, with the best crew members in the industry, and a brand that customers trust, will all help JetBlue emerge stronger from this crisis,” said Robin Hayes, JetBlue’s Chief Executive Officer.

“In the near term, we continue to manage our daily flying and take tactical actions to ensure we generate cash as demand recovers. We are also executing revenue and cost initiatives, redeploying our aircraft to new, cash accretive markets, and setting JetBlue up for a strong rebound. Naturally, we aim to be free cash flow positive, with the goal of repairing our balance sheet over the coming years.”

“Our average daily cash burn for the third quarter was $6.1 million dollars, ahead of the $7 to $9 million dollar range we anticipated 3 months ago. This was the result of a modest improvement in demand, beginning in August, variable cost savings achieved through a balanced approach to capacity, and the many actions we took to minimize fixed costs across our business. For the fourth quarter, we estimate our daily cash burn to be between $4 and $6 million dollars,” said Steve Priest, JetBlue’s Chief Financial Officer.

JetBlue Airways Stock Price Forecast

Eight equity analysts forecast the average price in 12 months at $13.33 with a high forecast of $17.00 and a low forecast of $10.00. The average price target represents a 6.13% increase from the last price of $12.56. From those eight analysts, three rated “Buy”, five rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $17 with a high of $30 under a bull-case scenario and $8 under the worst-case scenario. The firm currently has an “overweight” rating on the Airline’s stock. ValuEngine raised shares of JetBlue Airways to a “strong-buy” rating from a “buy”.

Several other analysts have also recently commented on the stock. Zacks Investment Research raised shares to a “hold” rating from a “sell” and set a $13 target price. Goldman Sachs Group upped their target price to $17 from $12 and gave the stock a “buy” rating. At last, JP Morgan raised their stock price forecast to an “overweight” from an “underweight” rating and raised their target price to $17 from $12.

Analyst Comments

“We like JetBlue’s significant exposure to the “Medium Haul” U.S. domestic market, which we believe is likely to be the first to return (with short-haul challenged by driving and long-haul more challenged by international regulations). Additionally, JBLU’s “snowbird” network provides significant upside as leisure travel returns,” said Ravi Shanker, equity analysts at Morgan Stanley.

Check out FX Empire’s earnings calendar