Royal Caribbean Cruises Ltd. (RCL) is trading sharply higher on Tuesday morning, despite missing fourth quarter 2019 estimates and lowering first quarter 2020 guidance. The buy-the-news reaction follows a two-week 15% slide in reaction to Australian bushfires and the coronavirus outbreak, suggesting that covering shorts are responsible for the majority of short-term gains. If so, the uptick could run into a fresh buzzsaw of selling pressure at any time.
Travel stocks have taken a major hit in recent weeks, with income streams battered by suspended flights to and from China, as well as continued delays in the re-certification of The Boeing Company's (BA) 737-MAX airliner. Investors are also avoiding the group because they're worried that headwinds will shrink worldwide GDP in the first quarter, possibly triggering a recessionary spiral. Uncertainty is a bigger negative than bearish headlines at this point because nobody knows how long this crisis will last or the final damage toll to lives and the economic outlook.
Royal Caribbean Cruises stock broke out above 10-year resistance in the mid-$50s in 2014, entering a strong uptrend that topped out above $130 in the fourth quarter of 2017. Breakout attempts in 2018 and 2019 failed, while a steep decline in the fourth quarter of 2018 dumped the stock to a two-year low in the upper $90s. Bullish price action reached range resistance for the fourth time in January 2020, once again triggering a major reversal.
The on-balance volume (OBV) accumulation-distribution indicator surged to a new high in November 2019, predicting that price would soon play catch-up. However, January headlines have trapped this large supply of bulls in losing positions, which could generate downside rocket fuel if this morning's bounce fails in coming sessions. Until then, short sellers should step aside and allow this oversold bounce to play out.
United Airlines Holdings, Inc. (UAL) stock topped out in the mid-$70s in 2015 and entered a steep decline that found support near $40 in 2016. It returned to the prior high in 2017 and broke out, but momentum buyers failed to show up, yielding dead sideways action into a secondary breakout in 2018. This bullish impulse suffered the same fate, yielding another 17 months of range-bound trading, ahead of a January 2020 downdraft that has triggered a failed breakout.
The stock is now sitting at exactly the same price posted in January 2015, meaning that long-term shareholders have booked a 0% return in the past five years. Worse yet, the company pays no dividend, which would have acted as a "consolation prize" for the dead money invested in this equity during one of the strongest bull markets in history. And given last month's breakdown, downside risk now exposes an unpleasant trip into the 2017 low in the mid-$50s.
Expedia Group, Inc.'s (EXPE) troubles started well before the coronavirus outbreak, with airlines, hotels, and car rental agencies taking matters into their own hands, contesting the company's near monopoly on U.S. travel with more competitive website pricing and deals. Expedia stock topped out near $140 in 2015, entering a trading range ahead of a failed breakout in 2017. Buyers returned in 2018, but 2015 resistance rebuffed four rally attempts into October 2019.
The stock plummeted more than 30% in two weeks in November after Expedia missed quarterly estimates, and it has failed two attempts to enter the sell gap. The price turned lower once again after the virus outbreak hit the newswires and may be headed into a dreaded test of the fourth quarter low, which also marks a three-year low. Ominously, that level is just five points above the 2016 low, raising the odds for a multi-year triple top breakdown.
The Bottom Line
Travel stocks are trading sharply lower in reaction to the coronavirus outbreak and other emerging headwinds.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.