Blue-chip defense contractor Lockheed Martin Corporation (LMT) rallied nearly 7% on Wednesday, while the iShares U.S. Aerospace & Defense ETF (ITA) jumped nearly 4%, in a sector-wide advance driven by growing tensions between China and the United States. Secretary of State Mike Pompeo added fuel to the uptick, announcing that long-held Iran sanctions waivers would be ending, ramping up pressure on the Mideast regime.
The defense sector got pummeled with the broad market in the first quarter, but revenues at these highly liquid companies are hard-wired through 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 aircraft and systems production off-loaded to dozens of third-party contractors.
Rising geopolitical tensions have reawakened these issues, with many defense stocks lifting off basing patterns near strong support levels, raising the odds that they'll return to bull market highs in the next few months. The 2020 election could then take control, especially if the Democratic candidate proposes defense budget cuts to manage the U.S. deficit, which has taken a massive hit due to multi-trillion dollar stimulus programs.
LMT Daily Chart (2018 – 2020)
Lockheed Martin is the highest-capitalized and strongest long-term sector performer, making it an obvious choice for exposure going forward. The maker of the F-35 fighter and America's missile systems is also better positioned than key rivals, with the new Raytheon Technologies Corporation (RTX) going through growing pains after the United Technologies-Raytheon merger. In addition, the trials and tribulations of former leader The Boeing Company (BA) have been well documented, with the collapse of commercial airline demand adding another major headwind.
A multi-year uptrend in Lockheed Martin stock topped out at $362 in 2018, giving way to a correction that posted a two-year low in December of that year. It returned to range resistance in July 2019 and broke out, posting an all-time high at $442.52 in February 2020. The subsequent decline triggered a failed breakout, but the stock recovered the contested level in early April and has spent the past seven weeks carving a base at support, ahead of this week's advance. Accumulation readings remain stuck at lower levels, but that could change as the uptick gathers strength.
RTX Daily Chart (2018 – 2020)
Raytheon and United Technologies completed their merger of equals on April 7, creating Raytheon Technologies Corporation, the newest Dow component. Raytheon shareholders received 2.3348 shares of the new company for each owned share, while United Technologies shareholders got a one-to-one conversion. The combined company has taken Raytheon's long-term chart, adjusted for a 39-for-23 stock split.
The stock posted an all-time high at $93.45 in February 2020, marking the fourth higher high since 2018. It crashed through those peaks during the March sell-off, also violating support at the 2011 and 2015 highs. The bounce into April cleared the two oldest highs before stalling just below the 2015 high, reinforcing new resistance in the low to mid-$70s. Despite Wednesday's uptick, the stock remains below that level as well as the April high at $68.79.
Raytheon Technologies stock stalled at the .50 sell-off retracement in April and is now testing that harmonic level for the third time. It is trading above the 50-day exponential moving average (EMA) for the first time since February but still well below 200-day EMA resistance, which has narrowly aligned with the .618 retracement in the mid-$70s. It will take a buying spike above that barrier to reinstate 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 could eventually test bull market highs.
Disclosure: At the time of publication, the author held Lockheed-Martin in a family account but no positions in other mentioned securities.