Shares of aerospace and defense giants Lockheed Martin Corporation (LMT) and United Technologies Corporation (UTX) exploded to all-time highs on Friday after the assassination of Iranian Major General Qassim Suleimani, which has greatly increased Mideast tensions. The Boeing Company (BA) and its broad supply chain also gained ground after the news, but continued delays for MAX re-certification could limit upside in coming months.
President Donald Trump led a charmed life with America's enemies in the first three years of his administration, sweet-talking North Korean dictator Kim Jung Un and drawing down military forces in the world's hot spots. Although he often argues against foreign involvement, it looks like that de-escalation period has now ended, raising the odds for fresh conflicts that keep a floor under defense stocks, regardless of who wins the 2020 election.
Congress has set aside massive funds for America's military since the 2016 election, and that lucrative budgeting is unlikely to change in coming years. The world's tinderboxes have grown even hotter during this period and are unlikely to cooperate, even if a new president would rather concentrate on health care and social justice. As a result, these stocks could offer steady profits, regardless of trade deals or the economic cycle.
Lockheed Martin stock broke out above the 2002 rally high in the low $70s in 2006 and charged higher, topping out at $120 just ahead of the 2008 economic collapse. It fell more than 50% into March 2009, bottoming out in the mid-$50s, ahead of a recovery wave that completed a round trip into the prior high in 2013. An immediate breakout gained traction through the middle of the decade, finally stalling above $350 in the first quarter of 2018.
The stock got pummeled for the rest of the year, losing more than 30% into the December low at $241. The 2019 bounce unfolded at a steep trajectory, recouping 100% of the 2018 losses by June. A breakout into the second half of the year made limited progress, easing into a trading range after stretching toward $400. Friday's breakaway gap has finally confirmed last year’s big rally, setting the stage for strong 2020 gains.
The uptick has now reached the 1.618 Fibonacci extension of the 2018 downtrend, marking a common reversal level. However, strong momentum increases the odds that the rally will extend to at least the 2.000 level at $460, where it will narrowly align with a rising highs trendline in place since 2014. A lot depends on Mideast events in coming weeks, with escalating violence underpinning the upside.
United Technologies stock broke out above the 2001 high in the low $40s in 20013, entering a strong uptrend that posted solid gains throughout the mid-decade bull market. It topped out just above $80 in the fourth quarter of 2007 and sold off, with the downside escalating in the second half of 2008. The stock bottomed out at a five-year low in March 2009 and turned higher into the new decade, completing a 100% retracement into the prior high in 2011.
A breakout stalled immediately, yielding sideways action that completed the handle of a massive cup and handle pattern in 2013. The stock then charged higher into mid-decade, running into a buzzsaw of resistance above $120 in 2015. That level marked a significant barrier into the fourth quarter of 2019, when bullish price action finally mounted a rising trendline going back to 2007. This impressive strength bodes well for significant gains in coming years.
The monthly stochastics oscillator has reached the most extreme overbought level since 1999 but is showing no signs of crossing over, indicating that upside can continue with few headwinds, at least in the short term. The trendline breakout supports this bullish view while also setting up a low-risk buying opportunity if an intermediate correction drops into that level. Trendline support is now located in the low $140s but will continue to rise in coming months.
The Bottom Line
Lockheed Martin and United Technologies could benefit greatly from Mideast tensions in 2020.
Disclosure: The author held Lockheed Martin shares in a family account at the time of publication.