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Defense Stocks On The Offensive

02/22/11 08:47:33 AM
by Ranjan Jha, CMT

The defense stocks are showing resilience despite on and off talk of budget cuts.

Security:   PPA
Position:   N/A

PowerShares Aerospace & Defense ETF (PPA) consists of Boeing, Honeywell, United Technologies, General Dynamics, Lockheed Martin, and other defense names. As discord over the next budget is gaining speed in Congress, it appears that no one is after defense spending as much as it was feared before. The recent price action of PPA seems to confirm that view. Figure 1 shows a weekly chart of PPA. It shows how defense stocks as a group are performing. Recently, it has cleared a resistance near $20 from August 2008, which it failed to surpass in April 2010. Since then, the price has stayed above that mark.

FIGURE 1: PPA, WEEKLY. Itís trading above both near-term and long-term resistance.
Graphic provided by:
We can take a closer look at day-to-day price action of PPA in Figure 2. The uptrend line since late November 2010 is firmly in place. The surge in volume on up days in the past several days is encouraging. In addition, since the beginning of 2011, the relative strength index (RSI)(14) became overbought. More than often, the RSI bounces roughly between the 40-50 and 70-80 range for an uptrending stock. Such action is more significant when it's supported by rising volume.

FIGURE 2: PPA EXCHANGE TRADED FUND, DAILY. Lately, PPA had several up sessions with relatively higher volume.
Graphic provided by:
Technical analysis generally has higher odds of success when it's in sync with the fundamental conditions. Large fund managers must be sensing that Congress may not target the defense budget after all. In addition, defense companies draw significant revenue from international sales. For example, Boeing, which caters to nondefense markets as well, makes more than 40% of its sales in the international markets. Now, you may decide on position sizing and stop-loss based on your time frame and risk appetite, but the intermediate-term technical signals with supportive fundamentals indicate that PPA has a good probability of trending higher.

Ranjan Jha, CMT

I am a member of the Market Technicians Association and manage a limited partnership investment club in Virginia. Always seek advice from your own Financial Advisor before acting on any method outlined here since every circumstance is different.

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