Let’s get one thing straight… I’m not some sort of defense industry perma bull.
Trust me, those people exist.
They hang out in the same circles as the ‘end-of-days’ folks, national debt doomers, and gold bugs.
It’s just not for me. I’m an optimist.
However, I’m also a good old-fashioned trend follower.
And these stocks have taken on a new leadership role, so we’ve been buying them. Here is Aerospace & Defense relative to the S&P 500:
This base breakout is in the books, and the path of least resistance is now higher for this ratio. All that means is expect more outperformance from these stocks over longer timeframes.
But I’m most interested in making money right now. This week, this month, this quarter.
And as I flipped through the A&D components today, there was one chart that I just couldn’t ignore.
Here it is. I’m trading this tactical reversal pattern in Lockheed Martin $LMT:
This is one of the largest defense companies in the world, with a market cap of over $100B, and it has largely escaped the rally in Aerospace stocks this year.
For reference, the iShares Aerospace ETF is up almost 40% from its April lows. Meanwhile, LMT is up a little over 10%.
And the underperformance here is nothing new. LMT is trading at its lowest level since 2013 relative to its peer group.
But with the stock looking poised to rip higher out of this base, I think that is about to change… at least over the short term– and that’s all that matters for this trade.
Here’s how I’m playing it:
I jumped the entry today on a break of the VWAP from last year’s all-time high. It comes in around 480.
This dynamic resistance level has halted advances in LMT several times over the last three months.
I plan to use the 38% retracement of the recent decline as confirmation. That will happen on a break of 495, and then I’ll add the second half of my common stock position.
However, I think this base is too good not to add a little leverage to.
With the common stock, I’m basically risking about 2.5% with a potential reward of 25%. My stop is at today’s low, and my target is at the all-time highs of about 618. That's a 10x risk/reward ratio.
But the upside doesn’t excite me enough, so I’m buying some near-the-money, short-dated calls as well.
I’m using the July monthly $520 calls. Some follow-through out of this base should put them in-the-money in no time.
On the other hand, if we roll over next week, I’ll be out on a close below 473.
I don’t imagine my price target will be achieved before expiration, but it doesn’t need to be. As long as LMT is on that path, this trade should pay very well.
If you are interested in some longer-term setups in the Aerospace & Defense industry, download the deep dive report we published this week. We outlined six of our favorite names, complete with trade details and analysis.
