charttrader

FLY THE FRIENDLY SKIES?

NYMEX:CL1!   Light Crude Oil Futures
The price of oil has been sliding in the second half of 2014, but airlines have not lowered their prices. Or brought back free meals. Or allowed domestic customers to check in luggage free of charge. So how can one turn flying friendly? Perhaps by purchasing U.S. airline stocks.

The cost of oil has plunged nearly 48% since the end of June and the market remains stuck in one direction. OPEC nations might make less profit and Russia, Iran and Iraq might be faced with significant economic and social issues. However, individual customers should be in the winning column.

Customers have not fully benefited from oil’s collapse. While gas is cheaper at the pump, food, clothes and airline tickets haven’t declined appreciably. Since these companies will not pass on even some of their profits to customers, then customers will need to extract benefits on their own.

U.S. airline stocks such as American Airlines (AAL) and Delta (DAL) have been surging since October 10, as they became easy choices for investors and short-term speculators. These stocks have been moving in the opposite direction than oil ( CL1! ) and they will remain in demand for as long as oil will be cratering.

The four-week correlation between oil and American Airlines is near perfect high negative levels. It rarely drops below -.8, and then the correlation doesn’t last more than a few weeks. Things have changed — the high negative correlation has been in place for 1 ½ months.

Only a bounce of the four-week correlation above -.8 would suggest profit taking on American Airlines and Delta.