U.S. aerospace and defense stocks got beat up in 2018, dropping major sector funds around 10%, but they retraced substantial lost ground in the first quarter. Blue chips that include Lockheed Martin Corporation (LMT) and Dow component The Boeing Company (BA) remain well below their bull market highs as we enter the second quarter, but a narrow basket of small- and mid-cap components are ignoring technical headwinds and trading at new highs.

The world is getting more dangerous by the day despite a year of peace talks with North Korea, and it makes perfect sense to assume that defense and aerospace budgets will rise substantially in the coming years, regardless of which political party controls Washington DC. As a result, many of these issues can be bought and tossed into long-term portfolios, walking away until true peace breaks out or a sky full of nuclear missiles spoils our interest in annual returns.

Technical chart showing the share price performance of Coda Octopus Group, Inc. (CODA)

Coda Octopus Group, Inc. (CODA) manufactures and sells underwater equipment and technologies for mapping, defense and other purposes. It trades just 60,000 shares per day on average, and insiders hold 69% of total shares. The company came public at 43 cents in 2010 and entered a downtrend a few months later, dropping to an all-time low at $0.01 in 2011. The stock has stair-stepped higher in the past seven years, finally breaking out to an all-time high in February 2019. 

Price action has held support at the 20-day simple moving average (SMA) for the past two months, exhibiting impressive relative strength. Wide bid/ask spreads have fostered plenty of volatile intraday price action, highlighted by March's ascending triangle breakout above $7.90. A pullback into that level would also test 50-day exponential moving average (EMA) support, predicting a low-risk buying opportunity, while the lack of overhead supply could generate high percentage gains.

Technical chart showing the share price performance of Ducommun Incorporated (DCO)

Ducommun Incorporated (DCO) designs and builds electrical and structural systems for the defense sector and other industries. Institutions currently hold 83% of outstanding shares. A multi-year uptrend ran out of steam at $26.85 in 1997, generating a resistance level that held firm into a 2007 breakout that stalled at $42.70 at year end. It failed the breakout in 2008, selling off in two broad waves that ended at a 16-year low in the single digits in 2012.

The subsequent recovery wave finally completed a round trip into the 2007 high in November 2018, giving way to a steep pullback, followed by a first quarter uptick that posted an all-time high at $47.28 on March 1. It has been consolidating gains for the past five weeks, trading in a narrow range pattern near the rally high. A buying spike to $48 would confirm a multi-year breakout, opening the door to the upper $50s.

Technical chart showing the share price performance of CAE Inc. (CAE)

Canada's CAE Inc. (CAE) provides aviation and aircraft services training to civilians, industry and the defense sector. Institutions currently hold 63% of outstanding shares. CAE came public on U.S. exchanges in the single digits in 2002 and fell to an all-time low at $1.90 in 2003. A multi-year uptrend stalled at $14.55 in 2007, marking long-term resistance ahead of a 2017 breakout that paused at $21.70 in June 2018. It sold off to a 10-month low in October and turned higher, bouncing back to the high in January 2019.

A rounded consolidation completed a nine-month cup and handle pattern in March, yielding a breakout that hit an all-time high at $22.66 on Tuesday. The rally is close enough to support at $21.50 to buy with limited risk, but a pullback could offer a better opportunity, with the 50-day EMA lifting into narrow alignment. However, it makes sense to hit the sidelines if the moving average breaks because the volume pattern suggests that the stock is vulnerable to a downturn.

The Bottom Line

A narrow basket of small- and mid-cap aerospace and defense stocks have lifted to new highs, well ahead of underperforming blue chips.

Disclosure: The author held Lockheed Martin shares in a family account at the time of publication.