Morning Comment: Travel & leisure stocks getting overbought near-term.

As we highlighted yesterday morning, large intraday-reversals (like the kind we got on Tuesday) almost always see some sort of upside follow-through over the very-short-term. That is exactly what we got some more dovish comments from Chairman Powell helped Tuesday’s intraday upside reversal see even more follow-through than normal. The value names pushed higher...led by the small cap (domestically oriented) Russell 2000 index which rally 2.3% and outperform the other major averages once again.

Of course, the more than 1% gain in the SPX and the DJIA was not chopped liver, so we don’t mean to say that the small cap area was the only one that had a good day. Heck, even the XLK and SMH technology ETFs rallied yesterday. However, there was no question that rotation out of growth into value was the big play again yesterday. The energy ETFs rallied more than 3%...and the bank ETFs rallied about 3% as well....while an equal weight index of the FAANG names ended in negative territory. So the “rotation” that has been going on for a while now seems to be accelerating........Having said this, some of the value plays are getting overbought on a near-term basis, so we’re expected some sort of “breather” in this trend before too long.

Speaking of getting overbought, the travel & leisure stocks are getting even more overbought than the bank & energy names. For instance, stocks like Southwest Air (LUV), Royal Caribbean (RCL) and Marriot (MAR) have become the most overbought they’ve been for many years. This does not mean that they’re going to roll-over in a major way. However, we are getting more comments from health experts about the new variants of the coronavirus could become a bigger problem. The Director of the CDC, Dr. Rochelle Walensky, is now saying that the new Covid-19 variants “stand to reverse” the nation’s control of the pandemic and could “undermine all of our efforts” against the disease if the virus is left to proliferate in different parts of the globe.

This follows the comments that we’ve highlighted quite often recently...from people like the Head of the Center for Infectious Disease at the U of Minnesota...who believe at new wave of Covid-19 will hit us like a Category 5 hurricane. So there is certainly a risk that the re-opening moves we’re seeing around the country could be pushed-out in the coming weeks...or even reversed. If (repeat, IF) that happens, these overbought stocks in the travel & leisure area are going to take more than just a “breather”...they’re going to get hit very hard.

Even if another wave of the coronavirus does not raise it’s ugly head, these names are still reached extended levels. Of course, they could still rally a bit further over the next few trading days, but we just want to point out that these stocks are getting to a level where their near-term upside potential is not particularly good. Therefore, long-term investorsshould be careful about chasing them up at these levels...and tradersshould think about taking some chips off the table.

We’ll focus on the airline stocks this morning. Both the daily and weekly RSI charts on the XAL airline index have reached their most overbought readings since late 2016. That said, we do admit that the top in late 2016 was followed by a drop of only 8% in the XAL, so we want to reiterate that the expected upcoming decline in the airlines might only be a mild decline (a “breather”)...rather than a correction. However, given our concerns about the new Covid-19 variants, we still think this is a group that investors need to be careful about over the coming days and weeks.

(On top of the two RSI charts on the XAL airline index below, we have also provided the daily RSI charts on LUV, JBLU and AAL to give you an idea of how extended this group has become after the most recent leg of its rally from the lows of last March.)

If you'd like to get these unique insights during these fascinating times in the investment world, please click here to subscribe to “The Maley Report.”......Thank you.

If you'd like to get these unique insights during these fascinating times in the investment world, please click here to subscribe to “The Maley Report.”......Thank you.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Feb 25, 2021 — 9:02 AM
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