The ETF Surprising Everyone

05/12/2011 6:00 am EST

Focus: ETFS

Moby Waller

Editor, Wyatt Research

Airlines made a big move up on the commodity sell-off, especially oil. This ETF covers the (relatively small) market, and although a rebound in crude could end this rally in a jiffy, the fundamentals remain strong for now.

A surprising sector is showing up among the top overall performers over the past four weeks: Guggenheim Airline (FAA). This fairly quietly trading (both in terms of volume and options) ETF is up almost 11% over the past four weeks, at the top of the ETF rankings when you exclude ultras and bears.

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FAA is fairly non-diversified, with 96% of its assets in its Top Ten holdings, and a great deal concentrated on three major US carriers, Southwest (LUV), United Continental (UAL), and Delta (DAL).

Taking a look below at the recent move, you can see airlines were in a steady downtrend over the past six months. The one major attempt to penetrate above middle bands and exponential moving averages in this downtrend came at the beginning of 2011…and failed at the top Bollinger and acceleration bands.

The current move in FAA began before crude oil’s (USO) sharp breakdown in the wake of bin Laden’s death, and the sharp profit-taking in other commodities. However, the decline in oil prices likely has helped FAA push above its top acceleration and Bollinger Bands in recent days—so, in my analysis, a reversal in oil is likely to cause this FAA rally to peter out, if one occurs. 

However, don’t fight the trend, as we often say…and this ETF is showing relative strength versus other sectors and the broad market, in addition to having a technical breakout recently.

Bottom Line: In terms of long-term holdings, I’ve never been a big fan of US airlines in general, because of low profit margins in the business and other structural problems. But for a short-term play, assuming oil prices are not going back higher, FAA looks attractive here, with 37 a low-risk entry point.

Moby Waller can be found at

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