Lockheed Martin Stock Unlikely to Hold Gains Despite Strong Quarter

Lockheed Martin Corporation (LMT) stock is trading higher on Tuesday after the company beat first quarter 2020 profit and revenue estimates. The world's largest defense contractor noted that the coronavirus pandemic did not have a "material impact" on operating results or business in the first quarter because its revenue is highly levered to government contracts rather than consumer appetites. However, the firm did reduce 2020 guidance, warning that supply chain delays could affect sales.

Earlier this month, rivals The Raytheon Company and United Technologies Corporation completed their merger, creating Raytheon Technologies Corporation (RTX), the newest component of the Dow Jones Industrial Average. United Technologies shareholders received new shares on a 1:1 basis, less than the 2.3348 shares received by Raytheon shareholders. The new company adopted Raytheon's long-term chart after a 39-for-23 split, translating into an all-time high in the mid-$90s in February. Raytheon Technologies is scheduled to report earnings on May 7.

Raytheon has recouped just half of the first quarter decline compared to Lockheed's 80% bounce. This lagging behavior may reflect the challenge of combining two mega corporations at the same time the world is shut down by the pandemic. That headwind places Lockheed, manufacturer of the F-35 fighter and America's missile systems, in an excellent position to complete a round trip into February's all-time high at $442.

LMT Long-Term Chart (2007 – 2020)

A multi-year uptrend topped out at $120.30 in September 2008, giving way to a 50% decline during the economic collapse. It behaved poorly after bottoming out in March 2009, grinding sideways in a narrow range pattern that carved three tests of the low into the second half of 2011. The stock turned sharply higher in 2012, entering a powerful advance that broke out to new highs in the summer of 2013.

The uptick eased into a rising channel in 2014 and held within those boundaries into a breakdown in the second half of 2018. The stock found support at a two-year low in the $240s in December and bounced strongly, returning to the prior high in June 2019. An immediate breakout failed to attract substantial buying interest until January 2020, when a climactic surge lifted into February's all-time high.

The monthly stochastic oscillator crossed into a sell cycle from an extremely overbought reading in November 2019, presaging the huge first quarter decline. The indicator is now stretching across the panel's midpoint, telling us that bears remain in charge despite a short-term uptick that has now reached resistance at the .786 Fibonacci sell-off retracement level. This structure predicts a reversal and pullback that tests the gains posted in the past month.

RTX Long-Term Chart (2008 – 2020)

The stock posted a new high at $48.66 in 2007 and turned lower, dropping into the low $20s during the 2008 through 2009 bear market. The subsequent bounce completed a round trip into the prior high in 2011, but it took another 13 months to confirm a breakout that posted respectable gains into the February 2015 high at $73.40. Sellers took control of the rest of the year, with downside pressure finally ending at a three-year low in January 2016.

A 2017 breakout booked little upside before failing in the second half of 2018. The stock eased into another advance after hitting a two-year low, reaching resistance in the $80s in May 2019. It finally broke out in November, adding points into February 2020's all-time high, ahead of a 56% decline into mid-March. The bounce since that time has recovered half of those losses, but the stock is still trading below resistance at the 50- and 200-day exponential moving averages (EMAs).

The monthly stochastic oscillator crossed into a sell cycle from the most extreme overbought reading since 1999 in February 2020, predicting at least six to nine months of relative weakness. Like Lockheed Martin, the indicator for Raytheon Technologies has just crossed the panel's midpoint, raising the odds for renewed downside that could reach March's eight-year low near $40. However, a quick spike into the $70s is possible before that scenario evolves, potentially offering a good price for shareholders to step aside.

The Bottom Line

Shares of Lockheed Martin and Raytheon Technologies have bounced strongly off March lows, but adverse cycles remain in control, predicting lower prices in coming months.

Disclosure: At the time of publication, the author held shares of Lockheed Martin in a family account but no position in Raytheon Technologies.