Defense stocks have pulled back following strong trend advances, underpinned by prospects for higher U.S. military spending during the Trump administration. Many of these issues are approaching or have reached support levels where committed buyers are likely to reload positions. Even so, sidelined investors should take a deep breath and play for the long haul because significant upside may wait until new spending parameters have been finalized.
Dow component Boeing Co. (BA) offers an exceptionally strong sector play, but its diverse operations could dilute this strategy’s objectives. In addition to military aircraft, the aerospace giant produces a broad range of non-military designs that could face increased headwinds if tariffs and border adjustment taxes become the law of the land. As a result, lesser-known plays with more-lopsided defense exposure could offer stronger returns.
Virginia blue-chip Northrop Grumman Corp. (NOC) broke out above the 2007 high at $77.30 in 2013 and entered a powerful trend advance that’s tripled the stock’s price in the last four years. It eased into a broad rising channel in 2015, holding those narrow boundaries in the last two years while signaling broad institutional and retail sponsorship that may continue through the rest of the decade.
The stock gapped up after the presidential election and stalled at channel resistance in December, ahead of a pullback that got bought at the 50-day EMA a few days later. A second test at that support level in January found willing buyers as well, with the stock now consolidating about 10-points under resistance. The next rally should break that barrier, ahead of an intermediate reward target at channel resistance between $265 and $270.
Southern California’s Teledyne Technologies Inc. (TDY) broke out of a 4-year cup and handle pattern with resistance at $66.50 in 2013 and entered an uptrend that’s posted a long series of all-time highs. The rally stalled near $110 in the fourth quarter of 2014, giving way to a triple top pattern that broke to the downside in August 2015 during the mini flash crash. The stock continued to lose ground into the first quarter of 2016, finally bottoming out at a 3-year low in the mid-70s.
It returned to resistance in September, pulled back and broke out after the November election, lifting to $129.36 in December. A broad consolidation pattern into February got bought after the company issued strong fiscal year guidance, with the rally posting an all-time high at $135.89 on March 1st, ahead of a pullback that’s now sitting on the 50-day EMA. Support at this level should offer a low-risk buying opportunity.
Iowa’s Rockwell Collins Inc. (COL) has underperformed the broad defense sector in recent years, but that could change in coming months. It rallied above the 2007 high at $76 in 2014, yielding an uptick that reached the upper-90s in May 2015, ahead of a trading range that’s still in play nearly two years lower. Three tests in the lower-80s have generated strong support while the stock has now reached range resistance and the psychological $100 level.
Straight up action since mid-January has set off overbought technical signals at the same time that rising price has reached range resistance, raising odds for a final downturn that shakes out overeager bulls. However, it makes sense to let price be the guiding force for trade decisions, buying a breakout into triple digits or waiting for a pullback to fill the February 27th gap between $94.50 and $95 (red line).
The Bottom Line
Defense contractors have been pulling back in recent weeks, working off overbought technical conditions following strong post-election breakouts and rallies. Many of these blue chips have now approached or reached price levels that should trigger bounces that continue their developing uptrends.