Airline stocks could lead the equities market higher in the coming weeks - that is, if Covid-19 cases have actually peaked.
Airline stocks could be setting up for a massive rally in the weeks ahead despite concerns about a second wave of coronavirus cases in the autumn.
The stock market is trading near all-time highs, leading many to question whether equities have become overvalued—but it’s worth noting that the rally has been driven mainly by a handful of tech companies. That leaves plenty of room to run for companies whose share prices haven’t seen much movement since the March dip.
Thomas Lee of Fundstrat Global Advisors said he sees beaten down sectors making a sizable comeback shortly if coronavirus cases start to decline in the U.S. By Lee’s calculations, the stock market could climb 30% higher in just two weeks.
Lee’s forecast assumes that coronavirus cases peaked on July 24. When cases stopped rising back in April, the stock market came roaring back to life 20 days later. Lee believes the same could be true this time around—and the twentieth day would be August 14.
What’s more, Lee says history dictates that the stock market will recoup 2.5 times its March losses–implying an upside of 30% over the next few weeks:
Since 1920, every stock market decline >35% saw a symmetric price recovery. In other words, the faster the markets fall, the faster the markets recover, and the ratio is 2.5X. Given the speed of the 2020, this implied making new highs before the end of the Summer.
Lee’s prediction points to the stocks hit hardest by the coronavirus lockdowns. While several sectors have suffered, it looks like airline stocks might be the best bet. That’s because a rally among airline stocks could translate into a short squeeze that pushes the group markedly higher.
Technical analysis shows that many airline stocks have slid into oversold territory, opening the door for a potential bounce over the next few weeks. One such stock flashing a buy signal is Delta (NYSE:DAL), whose share price has come crashing down after reaching the high-$30s in June.
If the bulls return to DAL, it could force investors who shorted the stock to cover their positions, thus triggering a wave of buying that shoots the stock higher.
It’s worth noting that there are still risks to betting big on airline stocks. Most notably is the fact that the sector is likely to continue struggling even if the pandemic is tamed. Many believe that more big carriers will eventually go bust, leaving investors trying to time a surge in airline stocks exposed to significant risk.
Lee’s forecast also rests on the belief that the market will behave as it has in the past—a big assumption considering the unprecedented nature of the coronavirus crisis.
What’s more, Lee’s prediction that the market will surge 20 days after Covid-19 cases peak is based on that happening just once before. It’s impossible to determine with any certainty whether history will repeat itself.
Still, with tech stocks reaching nose-bleed levels, value plays in the stock market are starting to look increasingly appealing.