Defense Stocks Could Head Back to the bull Market Peaks

Blue-chip defense contractor Lockheed Martin Corporation (LMT) rallied nearly 7% Wednesday while the iShares U.S. Aerospace & Defense ETF (ITA) has climbed nearly 4%, in a sector-wide advance fueled by the growing tensions between China and the united States. The secretary of State, Mike Pompeo added fuel to the upside by announcing that, for a long time, the Iran sanctions waivers would end, ramping up the pressure on the middle-east plan.

The defence sector got pummeled with the vast market in the first quarter, but the revenues of these highly liquid, companies are hard-wired to long-term government contracts, lowering the need for layoffs and belt-tightening. Supply chain disruptions have generated the major vulnerability during this period, with large segments of the aircraft and systems production-responsible for dozens of sub-contractors.

The rise of geopolitical tensions have given rise to these questions, with a lot of defense stocks lifting to build models near strong support levels, increasing the likelihood that they will return to the bull market highs in the coming months. The 2020 election could then take control, especially if the Democratic candidate is proposing the defence budget cuts to manage the U.S. deficit, which has taken a huge hit due to several billions of dollars of stimulus programs.

LMT Daily Chart (2018 – 2020)

Lockheed Martin is the highest-funded and most solid long-term sector of the interpreter, making it an obvious choice for the exhibition to go ahead. The manufacturer of the F-35 fighter and American missile systems is also in a better position than the main rivals, with the new Raytheon Technologies Corporation (RTX) in going through the pain of growth, after the United Technologies-Raytheon merger. In addition, the trials and tribulations of a former executive of The Boeing Company (BA) have been well documented, with the collapse of commercial aviation demand the addition of another big headwind.

A multi-year uptrend of Lockheed Martin stock topped out at $362 in 2018, leaving room for a correction, which has posted a two-year low in December of this year. He returned to the range resistance in July 2019 and broke, the display of an all-time high at $442.52 in February 2020. The decline has triggered a failure of the breakout, but the stock recovered in issue of the level at the beginning of April, and has spent the last seven weeks of the sculpture to a base support, to advance this week in advance. The Accumulation of readings remain blocked to lower levels, but this could change as the recovery gains strength.

RTX-Daily Chart (2018 – 2020)

Raytheon and United Technologies completed their merger of equals on April 7, the creation of Raytheon Technologies Corporation, the most recent Dow component. Raytheon shareholders have received 2.3348 shares in the new company for each property of the action, while United Technologies shareholders have a one-to-one conversion. The combined company has taken on Raytheon’s long-term chart, adjusted for a 39-to-23 stock split.

The stock posted a record high of $93.45 in February 2020, marking the fourth highest since 2018. It crashed through these peaks during the March sell-off, also violates the support at the 2011 and 2015 summits. The rebound in April cleared the two oldest high before stalling just below the 2015 high, the strengthening of new resistance in the low to mid-$70. In spite of Wednesday’s resumption, the stock remains below this level, as well as the April high at $68.79.

Raytheon Technologies to blocked stock at .50 to the sell-off of retracement in April and is now testing that level harmonic for the third time. It is trading above 50 days exponential moving average (EMA) for the first time since February, but still well below its 200-day EMA resistance, which is closely aligned with the .618 retracement in the middle of$70. You have to buy the spikes at the top of the barrier to re-enter the bullish technical outlook and set the stage for a rally back to the bull market high.

The Bottom Line

Defense contractors have turned higher after a deep first-quarter correction, and finally able to test the bull market highs.

Disclosure: At the time of publication, the author held Lockheed-Martin, in a family account but no positions in other securities.


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