Summary

• Airline stocks have surged in recent weeks which has provided a potential opportunity to sell.
• The airline sector has historically been very tough and challenges such as high fuel prices, contagious diseases, and terrorism are not gone forever.
• Investor sentiment appears way too bullish now and a recent IPO (which surged), could be a major sign of excessive optimism for this sector.

When everyone seems to love a certain asset class, it could be time to sell and run for the hills. Gold is a great example, everyone seemed to love it a couple years ago and back then it was going for nearly $2,000 an ounce. That turned out to be a great time to sell, but many investors were overly optimistic and now the precious metal trades for almost half that level. This is reminding me of another sector that seems to have had a lot of great news lately, fueling a very strong rally. Take a look at the charts below for two major U.S. airlines and you will see a parabolic run during the past few weeks. Much of this has been due to relief that Ebola currently appears contained, but mostly it appears due to a decline in oil prices.

As the chart for Delta Airlines (NYSE:DAL ) shows, this stock has shot up from about $30 to nearly $44 per share in just the past three weeks. Delta shares have a Relative Strength Index or RSI of nearly 70, which indicates this stock is overbought. It’s also not that cheap anymore as analysts expect it to earn $3.25 per share in 2014. That puts the price to earnings ratio at close to 13 times, which (for an airline) is not particularly cheap.

The chart for United Continental Holdings Inc. (NYSE:UAL ) also shows a big move from about $40 in mid-October to nearly $56 per share today. This stock is also overbought with an RSI of roughly 65. With earnings estimates at nearly $5 per share for 2014. this stock appears to offer more value when compared to Delta, but it still does not appear undervalued.

If you look at the chart for the United States Oil Fund (NYSEARCA:USO ), you can see that oil prices have been hit hard in the past few weeks, which correlates perfectly with the parabolic run in the airlines. This chart also shows that oil is oversold with a RSI of about 32. The airline business has historically been extremely challenging over the long term, and I believe the easy money has been made in this sector. There is no doubt that the airline sector has been able to catch a break lately from many potential risks which include rising fuel prices, contagious diseases like Ebola, crashes, and the threat of terrorism. However, I would not expect this honeymoon period to last for too long because that has just not been the case historically. As a contrarian investor, I would much rather be selling airline stocks at recent highs and deploying that capital into beaten-down energy stocks.

The recent drop in oil prices may not last for too long and with a mega-deal in this sector between Halliburton (NYSE:HAL ) and Baker Hughes (NYSE:BHI ), it could be a major sign that executives at Halliburton do not expect oil to go down or even remain at current levels. If these executives expected oil stay weak for an extended period, it seems doubtful that they would make such a big bet on the industry. A couple of factors could cause oil to rebound soon and that includes an OPEC meeting on November 27 in Vienna. Saudi Arabia seems to be acting nonchalant about the recent drop in oil, but this could all just be an attempt to gain the upper hand in negotiating production cuts. The Obama Administration has been trying to get Iran to sign a deal on its nuclear program and the deadline for that is November 24. If those talks end unsuccessfully, it could raise tension in the Middle East and spark concerns that Israel may eventually act alone and take military action against Iran’s nuclear facilities. All this is to say that I believe much of the recently rally in airlines appears to be due to the decline in oil, and that this is not something investors should continue to count on. There is one other major reason why I think airline stocks are likely to disappoint going forward and that is the recent IPO of Virgin America (NASDAQ:VA ). Investors should be mindful of the fact that if market conditions are so darned good that an airline can not only go public, but also surge from a $23 IPO price to nearly $33 in just days, it is possibly a sign of a top for the sector.

In just a few weeks, I will be writing about beaten down stocks that could be poised for big gains as tax loss selling fades towards the end of the year. Many of these picks are likely to be oil stocks which I believe are poised to rally into January. Click on follow me above in order to hear about these stock picks soon.

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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.