Aerospace and defense stocks are often turned to by investors and traders to respond to upticks in geopolitical tensions, which alone makes a strong fundamental case for further research. From a technical perspective, for most sectors, the uptrend that has dominated over the past several years has made it more difficult for active traders to find segments that don't seem to be extremely overbought and set for major pullbacks. In the paragraphs below, we'll take a look at three charts from across the aerospace and defense sector to discuss why underlying setups make now the ideal time to buy.
SPDR S&P Aerospace & Defense ETF (XAR)
For those who are interested into adding exposure to a niche market segment such as aerospace and defense, exchange-traded products such as the SPDR S&P Aerospace & Defense ETF (XAR) could be a good solution. As the name suggests, the fund's managers seek to hold a portfolio of companies from across the aerospace and defense sector, which include large-, mid- and small-cap stocks.
Taking a look at the chart, you can see that the 2019 has been favorable for the bulls so far, and the rise in price has led to a bullish crossover between the 50-day and 200-day moving averages. Traders will want to take note of how the 200-day moving average has acted as a predictable guide for determining the placement of buy and stop orders for many months. Given the long-term buy signal shown by the moving average crossover, we expect that this will mark the beginning of a long-term move higher and that traders will look protect their positions by placing stop-loss orders below $91.28.
Axon Enterprise, Inc. (AAXN)
Active traders who are looking for specific companies to buy in certain segments are often well advised to start by researching the top holdings for sector-specific funds. In the case of XAR, Axon Enterprise Inc. (AAXN), the maker of TASER and related security products, represents the fund's top holding with a weighting of 5.35%.
Taking a look at the chart, you can see that the bullish price action over the past several weeks has triggered a bullish crossover between the long-term moving averages (shown by the blue circle). The common buy sign suggests that the bulls are in clear control of the long-term trend and that the nearby support is creating a lucrative risk-to-reward ratio. Stop-loss orders will most likely be placed around $56.53 in case of a sudden sell-off.
Arconic Inc. (ARNC)
Another top holding of the XAR ETF is Arconic Inc. (ARNC) with a weighting of 4.38%. The fund is more of an indirect pick when it comes to aerospace and defense since its products are used in many market segments aside from aerospace. However, Arconic has a strong presence in the development of structural and rotating aero engine components, and it has invented the majority of all the aluminum alloys that used in the development of aircraft.
Taking a look at the chart, you can see that the 50-day moving average has recently crossed above its 200-day moving average, and as discussed on the charts above, this is traditionally used to mark the beginning of a major uptrend. Based on the pattern, traders will likely look to buy near current levels and protect against a sell-off by placing stop-loss orders below $20.40 or $20.18, depending on risk tolerance.
The Bottom Line
Aerospace and defense stocks are often looked to by investors as a natural hedge against rising geopolitical tensions or because of other macro factors such as increased global demand for the underlying products or an expanding middle class that is interested in air travel. Based on the charts discussed above, the nearby support of major moving averages and the associated crossovers suggest that now is the time to buy.
At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.