Boeing: Rare Short Opportunity

06/03/2015 9:00 am EST

Focus: STOCKS

Joon Choi

Senior Portfolio Manager, Research Analyst, Signalert Asset Management LLC

We are in the midst of one of the strongest bull markets in history, with the S&P 500 Index up some 250% since the bottom in 2009; during such a favorable climate, it is very hard to profit from short positions, cautions Joon Choi, editor of Systems & Forecasts.

However, equities are showing signs of an aging bull market; for example, the transport sector is lagging and the weekly market breadth has been deteriorating. Meanwhile, some potential short opportunities have been surfacing in recent weeks.

One of the most attractive short candidates is Boeing Company (BA), which is up 470% from its low in 2009; easily outpacing the broader market by more than 200%.

You would have been a happy camper if you were holding the stock during the current bull market. But Boeing seems to be showing signs of weakness that may turn into a correction (greater than a 20% loss).

Although Boeing's monthly price has made a higher high in recent months, the MACD has failed to do so, forming a negative divergence that may be a signal for a sell-off.

Boeing’s trailing 12-month P/E ratio has also formed a negative divergence versus price. This type of pattern occurs when the vehicle is about to pull back just like Boeing did in 2007 when it incurred a 70% drawdown.

Even with a massive stock buyback program, the impact on shareholders’ value seems minimal. The outstanding shares have been falling as the price has been rising, similar to during the stock market top in 2007. The acceleration of stock buybacks in 2008 did little to stabilize the share price.

The current slope of the EPS trend is similar to the one in 2007, which leads me to believe that a significant sell-off may be around the corner.

As the Fed is preparing for an interest rate hike sometime this year (either September or December), the current bull market may lose some steam going forward. Moreover, the transport sector is lagging the overall stock market and may be hinting that a 10%+ sell-off may arrive later this year.

Instead of selling equity positions to reduce equity exposure (since our proprietary model is still flashing bullish conditions), I am recommending to sell short Boeing, a rare shorting opportunity. I have a price target of $108 and stop loss level of $149.

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