Dow component The Boeing Company (BA) was trading at a two-month low on Monday, losing ground for the third straight session after Reuters uncovered 2016 pilot messages criticizing the poor handling of the MAX 737 airliner, grounded worldwide in March after two fatal crashes. The revelations mark the latest setback for the aerospace giant while adding to concerns about a cover-up and an overly cozy relationship with Federal Aviation Administration (FAA) regulators.
The bombshell also turned up the heat on CEO Dennis Muilenburg just days after Boeing's board dropped the dual chairman role to focus his undivided attention on getting the troubled airliner back in the sky. This action may have backfired, with growing calls that he resign in order to restore the company's severely damaged reputation. The New York Times added to fuel to the dumpster fire as last week came to an end, noting that Boeing may have intentionally lied to regulators.
Wall Street analysts are finally lowering estimates and ratings on Boeing after months of cheerleading, with UBS and Credit Suisse downgrading the stock to "Neutral" over the weekend. In addition, it now appears that the MAX won't fly again in 2019, even though the company recently insisted that it would be airworthy "early in the fourth quarter." This chronic loss of trust makes it even harder for sidelined investors to take the plunge and keep a floor under the evolving downtrend.
What should current Boeing shareholders do, given rising odds for lower prices? Is it too late to sell, or should current shareholders wait for inevitable bottom fishing calls, even though recent revelations have attracted renewed government attention? Indeed, this is starting to play out like the Well Fargo & Company (WFC) scandal earlier this decade, when the CEO added months to a brutal decline by refusing to resign. Many hope that Muilenberg's departure will come more quickly, given his upcoming testimony to a Congressional oversight committee.
It may take the CEO's resignation to put a floor under the stock at this point, with new management likely to attract a fresh wave of bottom fishers. A detailed timetable for repairs and airworthiness would be even better, allowing shareholders to see the light at the end of the tunnel. Remaining bulls hope that this happens as early as Wednesday, when the company reports third quarter earnings, but last week's troubling revelations make it less likely.
BA Short-Term Chart (2017 – 2019)
The uptrend that started in early 2016 stalled near $400 in October 2018, giving way to a sell-off that posted a 52-week low in December. Buyers returned in January, lifting the stock to an all-time high at $446 just before the second MAX crash. The on-balance volume (OBV) accumulation-distribution indicator failed to post a new high at the price peak, setting off a bearish divergence that resolved quickly into much lower prices.
OBV has drawn a well-organized trendline of lower lows since March 2018 (lower red line), signaling distribution that started well before the MAX crashes. It also suggests that the current downturn won't end until the indicator dumps to a two-and-a-half-year low and tests that support level. Ominously for bulls, the stock was trading near $225 at that time, or more than 100 points lower than this morning's opening print.
Finally, the stock has been trading between the December low and March high for more than seven months, stuck between the .382 and .786 Fibonacci retracements of the three-month rally wave. The decline into this week is now approaching a rising trendline formed by the December and August lows, with a breakdown exposing the 2018 low at $292. In turn, the downdraft may complete the next leg of a head and shoulders topping pattern that lasts into 2020.
The Bottom Line
Boeing stock could break the mid-summer low near $320 after last week's revelations and test the December 2018 low at $292. Current shareholders should hope for the best but prepare for the worst, reducing position size or buying options protection that can outlast the controversy.