LESSON SIX

AIRLINES - PART TWO

Over the past dozen days we have watched the price of oil drop from over $135 to as low as $122 per barrel, or nearly 10%. It remains volatile, but the fact that we have not approached new oil price highs for half a month is encouraging enough that one could hypothesize that the price trend is now down, or at least flat.

Anyone who says this is THE buying opportunity for airlines is just guessing. (Remember, we said that if oil drops significantly, airlines will probably get a serious bounce upward of maybe 50 to 100% or more.) This opportunity might come after the summer driving season or after a hurricane induced oil price bubble, but when it comes we would like to profit from it.

In the last blog , we suggested that one might be a buyer of airline stocks on any $10 per barrel price decline and this was achieved June 3.

Reviewing the airline play:

1. Oil prices are likely to fluxuate by large percentages.
2. On any significant decline in oil prices, there will probably be corresponding jump in airline stocks.
3. I'm suggesting that on any decline in oil of $10 per barrel, airline stocks should be bought.
4. This is a trade, not a long-term hold, and these stocks are highly speculative. So one should be ready to
exit on any loss of over 5% from your buy price or any decline of 10% from a peak.
Examples: A) Buy at 10.00 - exit at 9.50 to limit your loss to a maximum of 5%.
B) Buy at 10.00 and the stock goes to 14.00. Sell at 12.60, or a decline of 10% from the peak.

Recent June 3 June 5
Low Close Close

American (AMR) 6.22 7.32 7.82
Continental (CAL) 13.18 14.52 15.24
Delta (DAL) 5.50 6.10 6.80
Jet Blue (JBLU) 3.97 4.02 4.32
United (UAUA) 7.52 8.52 10.05
US Air (LCC) 3.96 4.06 4.43

Note: From the low date through 6/5, this group has run up 8.8 to 33.6%. And in just the last two days, the airlines have bounced approximately 5 to 15%. This move in such a short time frame on a fairly small move in oil prices is strong evidence of the inverse correlation between oil and air and the strength of that relationship.

As I listen to the "experts", the overwhelming consensus is that oil is not going under $120 - but, if history is a reliable guide, at some point the conventional wisdom is going to be wrong and we may be in for a move that is much bigger than anyone currently suspects.

TODAY'S LESSON: Know when you are getting into a speculative trade, like this one is. Monitor it on a daily basis. And, above all, proceed with DISCIPLINE! Have a clearly defined exit strategy and stick with it. Do not let a small loss turn into a killer.

Also, for the cautious investor: If a trade appears to be outside your comfort zone - try entering with a minimal purchase of shares and then add to the position should you start to show a profit on the trade.

Blog written on June 5 after the market close.