Make Money Where Warren Buffett Couldn't

Make Money Where Warren Buffett Couldn't
By Jeff Clark
February 25, 2010

I'm not sure what is worse, traveling on an airline or operating one.

There is nothing enjoyable about flying. You have to get to the airport two hours early and snake through the cattle line for the privilege of paying 50 bucks to check your baggage. You run the risk of being strip searched if you mistakenly pack a four-ounce bottle of shampoo in your carry-on. Once on the plane, you end up wedged between a former NFL lineman on one side and a lactose-intolerant life insurance salesman on the other. The toddler in the seat behind you plays "kick the can" with his tray table. And if you get hungry or tired, you need to pay up for a bag of granola, pillow, or blanket.

As bad as this experience is as a passenger, it is far worse as an owner. Airlines are perennial money losers. They're fiercely competitive, capital-intensive businesses with wafer-thin margins. Most airlines are buried under a mountain of debt, lose money on nearly every flight, and are vulnerable to even the slightest increase in the price of oil.

Heck, even the world's greatest investor, Warren Buffett, couldn't make money off his venture into the airline business when he bought stock in U.S. Air several years ago.

Despite all these issues, however, there are a few times every decade when airline stocks catch a bid. We've just experienced one of those times. In the past 11 months, the Airline Index (XAL) rallied from a low of $13 per share to just under $36 – a gain of more than 175%.

Who's buying the stocks? I have no idea. Maybe it's short sellers buying back their positions. Perhaps it's oil traders looking to make a contrarian bet. Or maybe it's the same folks who were buying General Motors at $40 per share months before it finally succumbed to bankruptcy.

It doesn't matter who's been buying the stocks and pushing the index higher over the past few months. What's important is how fast those folks will sell the airlines when the trend turns lower.

And by the look of the chart, that may happen soon...

Last week, XAL rallied up to challenge its January high. But instead of breaking through resistance, the stock turned lower and formed a "double top." This is a bearish sign.

Worse yet, the Moving Average Convergence Divergence (MACD) indicator – which illustrates the momentum behind a trend – failed to even come close to its earlier high point. This type of action is often an early warning sign of an impending trend change. So we have a fundamentally poor sector that now has weak technical action. This is as close to an ideal short-selling setup as we'll ever find.

The World's Biggest Downtrend

Short Stocks Now

Think about it this way…

If even Warren Buffett couldn't make money buying into this sector, maybe the best chance to profit comes from trading it from the short side.

Best regards and good trading,

Jeff Clark

Editor's note: Last week, Jeff told Short Report subscribers about his favorite short trade in the airline sector, and it's not too late to get in. His previous airline recommendation jumped 119% in just over one week. If you'd like to find out what Jeff is recommending now, click here.

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•	Commercial real estate defaults hit 3.8% last quarter, up from 1.6% in the same period last year.
•	Discounters Big Lots, PriceSmart, Dollar Tree hit fresh highs.
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	Last	Change	52-Wk
S&P 500	1105.24	+0.97%	+42.95%
Oil (USO)	38.99	+1.72%	+59.53%
Gold (GLD)	107.36	-0.49%	+13.33%
Silver (SLV)	15.62	+0.32%	+14.77%
U.S. Dollar	80.93	+0.22%	-7.76%
Euro	1.35	-0.35%	+6.15%
VIX	20.27	-5.15%	-55.44%
HUI	388.91	-0.42%	+33.89%
10-Year Yield	3.70%	0.01	1.18

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Company	Sym	Industry
Treehouse Foods	THS	packaged food
Teva Pharma	TEVA	pharma
IMS Health	RX	medical research
Xilinx	XLNX	semiconductors
Ashland	ASH	chemicals
L-3	LLL	Big Defense
Cooper Cos	COO	medical devices
Big Lots	BIG	discount store
Autodesk	ADSK	software
Brit Am Tobacco	BTI	cigarettes
Brown Shoe	BWS	shoes
Buckeye	BGH	pipelines
Moog	MOG-A	defense
IdaCorp	IDA	utilities
Buckeye Partners	BPL	pipelines
Targa Resources	NGLS	pipelines
Raytheon	RTN	Big Defense
Werner	WERN	trucking
JDS Uniphase	JDSU	telecom
Validus	VR	insurance
Brookfield	BPO	property mgmt
Home Depot	HD	home goods
OfficeMax	OMX	office store
Mattel	MAT	toys
Arch Capital	ACGL	insurance
Carnival	CCL	cruises
Cracker Barrel	CBRL	restaurants
VeriFone	PAY	payment equip
Tanger	SKT	retail REIT
Dollar Tree	DLTR	discount store
PriceSmart	PSMT	discount store

Company	Sym	Industry
Tata Comm	TCL	telecom
China Hydro	CHC	utilities
EPIQ Systems	EPIQ	software
Select Medical	SEM	hospitals
SunPower	SPWRA	solar panels

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