Don't Fall For This Stock Market "Head Fake"

By Lou Basenese, on Tuesday, June 9, 2020

As I write these words, a certain market sector is surging:

I’m referring to Travel — which includes airlines, hotels, and cruise companies.

Just look at Norwegian Cruise Line (NCLH). Since last week, its shares have surged 55%.

But why? After all, its ships won’t be sailing with paying customers until at least August.

Today, I’ll show you what’s happening…

And then I’ll explain why you should avoid it!

Prepare for a Crash-Landing

Travel companies have been among the hardest hit due to the coronavirus.

The thing is, as the economy re-opens, investors are snapping up their shares as if they’re “bargains.”

Case in point: Southwest Airlines (LUV) is up more than 20% since last week.

But I can guarantee you that Southwest’s fundamentals haven’t suddenly improved by 20%.

You see, for family reasons, I’ve being flying Southwest every week. For the last few months, there were five or fewer passengers on board with me. I even had flights where I was the only passenger.

These planes can carry up to 170 people. So we’re talking about Southwest operating at less than 5% capacity.

In recent weeks, I’ve seen a jump to about 30 passengers per flight. But that’s still less than 20% capacity — which is nowhere close to enough for Southwest to pay the bills.

Discounting Foresight

Now, certainly, the stock market is a forward-looking beast….

And it’s true that many travel businesses will rebound in a post-pandemic world.

But stock prices are recovering at a rate that suggests the return to normal will happen in a matter of months.

Unfortunately, history proves it will likely take years.

Consider 9/11. After the national tragedy, it took six years before airlines fully recovered.

But post Covid-19, as fears linger about being crammed into a small space with hundreds of others, it could take even longer.

Trust the Data

And actually, there’s an easy way to see if this rebound in Travel stocks is real:

Look at trends in Internet search traffic.

Home Depot (HD) serves as the perfect case study.

For example, as you can see at the far right, Google Trends data shows a spike in searches for the company as lockdown orders went into effect.

As it turns out, being stuck at home prompted everyone to get cranking on their honey-do lists!

And sure enough, Home Depot reported a 7.1% increase in sales in Q1, to $28.3 billion.

In other words, those Internet searches led to real-world consumer activity.

So, based on fundamentals, Home Depot shares being up 68% from their March low is justified.

So now let’s see what we find when we look at Internet searches related to Travel…

Still Grounded

As you can see below at the far right, search activity for Travel has plummeted through the pandemic.

The momentary spike for airlines (the blue line) is easy to understand:

Everyone was trying to sort out the travel they’d booked already!

Today, search traffic for each of these “hot” sectors is still far below pre-crisis levels.

Bottom line: based on the correlation between search activity and real-world activity, the rallies in these stocks is unjustified and unsustainable.

So don’t go chasing airline, hotel and cruise stocks. They’re extremely overbought right now.

And if you need any more convincing that stock prices can be temporarily divorced from reality, consider Hertz Global Holdings (HTZ).

Since the company recently declared bankruptcy, its shares have more than doubled. Umm, hello? Bankruptcy means the stock is worthless, not worth more.

Clearly, we’re living through crazy times.

But that doesn’t mean you need to be “crazy” with your investing.

Don’t follow the crowd. You’ll regret it. Instead, be patient and stick to your plan!

Ahead of the tape,
Lou Basenese
Lou Basenese


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