Airlines are getting slammed ahead of Delta earnings, but they could see a turnaround

You could say the recent run in airline stocks has been turbulent at best.

Shares of Southwest, American Airlines, JetBlue and United fell Tuesday, with Delta the only name in the S&P 500’s airline industry group to close the day positive. So far this year, the sector has largely fallen out of favor; Southwest, Alaska, American and Delta are all firmly in bear market or correction territory. And as far as S&P industry groups’ 2018 performance go, only tobacco stocks beat out the airlines to the downside.

Some traders and strategists, however, see the potential for a turnaround in store as investors look to Delta’s quarterly earnings report, scheduled for Thursday.

The group looks like a buy at this juncture as investor sentiment has become so depressed, said David Seaburg, head of sales and trading at Cowen.

“I think we’ve gotten to the point with airlines where it feels like investors are just giving up. We saw oil prices obviously going higher, jet fuel costs are obviously going higher as a result and you’ve seen capacities start to ratchet up as well, since the fourth quarter of last year. So we’re at the point right now where it feels like investors are just saying ‘mercy,’” Seaburg said Tuesday on CNBC’s “Trading Nation.”

Much of the analyst community’s commentary on the airlines has been fairly negative as oil prices have rocketed higher in recent months, said Stacey Gilbert, head of derivative strategy at Susquehanna. But that may indicate an upside surprise ahead.

The options market is implying a move of roughly 4 percent in either direction for Delta shares on earnings, Gilbert said Tuesday on "Trading Nation," which is a bit larger than is typically seen. The directional flow of Delta options is largely call buying, which would suggest rather bullish investor sentiment ahead of the report.

This flow would suggest that, "maybe the worst is out there, given the Delta Airlines commentary previously. But we’re also seeing call buyers in other airline names, like American Airlines for example, where there’s continued call buying. So I do think it’s worth highlighting that yes, the news out there has certainly been negative. Yes, the tone out there is negative. But in terms of directional sentiment, we’re seeing more contrarian players saying the worst has been priced in and there could be an upside surprise."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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