tastytrade logo
Jet flying above buildings

Sep 21, 2021

S&P 500 Sinks on Evergrande Risks Ahead of FOMC, Airline Stocks’ Outlook Brightens

By:Diego Colman


  • S&P 500 plummets on concerns about a possible Evergrande default and financial contagion
  • Uncertainty over the Fed’s monetary policy normalization roadmap ahead of this week’s FOMC decision is also weighing on sentiment
  • Despite growing risks to the market, there are still some bright spots. For instance, airline stocks are starting to look attractive and may offer asymmetric upside potential

U.S. stocks suffered a sharp sell-off at the start of the week, following similar declines overseas on widespread bearish sentiment unleashed by concerns of a collapse of Evergrande, one of China’s largest property developers and reportedly the most indebted real estate company in the world with more than $300 billion in liabilities.

At the market close, the S&P 500 fell 1.7% to 4,357 while the Dow Jones tanked 1.8% to 33,970. Meanwhile, the Nasdaq 100 also sustained heavy losses, plummeting 2.1% to 15,012 as nervous investors headed for the exits and increased demand for safe-haven assets (e.g., US treasuries).

Wall Street fears that a default by the beleaguered Asian firm will spill over into the region's housing market, hurt the lending sector, batter confidence and damage the Chinese economy, triggering a financial crisis of broad proportions. While it is unlikely that the Chinese authorities will eventually let the situation get out of hand, their lack of response and public assurances are certainly causing anxiety and depressing risk appetite.

At the same time, uncertainty about the path of U.S. monetary policy ahead of the FOMC meeting appears to be reinforcing the defensive mood, in the midst of extreme complacency and frothy valuations, at a time when the S&P 500 had not experienced a significant pullback of 5% or more in nearly 12 months.

On Wednesday, the Federal Reserve will announce its September policy decision. No change in interest rates is expected, but the bank may provide “advance notice” that the process to reduce the pace of asset purchases will commence soon.

Considering that that the central bank has heavily choreographed its intention to start tapering quantitative easing this year, attention is likely to fall on the dot plot, particularly as the institution is set to introduce the 2024 projections.

Given that a rising chorus of policymakers are concerned about the trajectory of inflation, judging by the recent narrative hitting the airwaves, it would not be surprising if some members shifted their dots higher and penciled in tighter monetary policy for the next three years (for reference, if only two Fed members were to move up their dots for 2022, the median expectation for that year would increase).

A hawkish surprise in the dot-plot diagram could lift US treasury yields and weigh on rate-sensitive technology companies with high valuations. This, in turn, could trigger a downside move in the S&P 500 due to its heavily tech-oriented composition.

Despite the risk of larger pull-back or at least some near-term underperformance in the S&P 500, there may still be good opportunities out there, but investors will need to be more selective when constructing their portfolios. That said, the transportation sector, particularly the airline industry seems attractive and provides a compelling risk/reward profile over the medium term.

Since March/April, airline stock prices have been walloped by rising COVID-19 cases and weak travel demand. However, with fears for the delta-variant abating and coronavirus infection counts declining as vaccination expands, the industry’s recovery could gain momentum, especially as the Biden administration prepares to revoke its travel ban on visitors from 33 countries in November (the White House announcement that it will lift travel restrictions for international visitors who are fully vaccinated may be the reason some airlines are trading higher despite the overall weakness in the stock market).

Loosened travel restrictions will boost revenues and help many airlines achieve profitability in the coming quarters, as many commercial carriers with extensive international flights derive approximately one-third of their revenues from these routes. The improving outlook for the travel segment means that sold-off names such as American Airlines (AAL), Delta Airlines (DAL), Southwest Airlines (LUV) and United Airlines Holdings (UAL) can assume leadership and command strength over the medium term. To avoid company risk that can arise from poor management execution, the bullish thesis for air travel can be approached via the JETS ETF (this is a passively managed ETF that gives traders/investors access to the global airline industry, including airline operators and manufacturers).


Looking at the daily JETS chart, resistance can be seen at 23.15, near a short-term descending trendline in play since late July. Should bulls push price above this level, buying momentum could gain steam and pave the way for a move towards 24.13, a technical barrier created by the 38.2% Fibonacci retracement of the March/July pull-back. Lastly, a rise above 24.13 could expose the 24.75 mark.

On the downside, the first support to consider appears in the 22.00 psychological region. If this floor is invalidated, bears could reassert selling pressure and drive the JETS ETF towards its 2021 low in the 21.15 area.


JETS etf technical chart
Chart prepared by Diego Colman; JETS on Tradingview

---Written by Diego Colman, DailyFX Market Strategist, Follow Diego on twitter

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.