Are Defense Stocks Better Than Gold?

In a blog post from last week, David Rosenberg makes the case that defense (or “defence”) stocks might be a better way to play global instability/market volatility than Gold. While he may be right (in the long-term), I see one issue here.  The technicals for the defense sector are very iffy.  This isn’t to say that the technicals for Gold ($GLD) look better – they don’t. But if you are going to take this trade, in order to minimize risk, you have to be wary of the bearish pattern that has formed on the weekly chart.

The Chart

The first thing that stands out to me is the massive run we’ve seen in this sector since the start of 2013 – which ironically was the start of the “Fiscal Cliff” (in case you forgot: The sequester was supposed to be the bad for the defense sector because of spending cuts).

The 2nd thing that I immediately saw was the bearish head-and-shoulders pattern. While the sideways consolidation near the all-time high is nice, setting a lower high here at the right shoulder would signal an intermediate-term top. A break of ~103 (at the moment) would confirm the pattern and we should see a measured-move flush to the mid-90s (which would be target one). Below that, I’d be looking at 89-90 as support and target two. And finally, if we really see a major flush, I’d be looking at the 200-week SMA for the last target area.

The best way to play this chart to the downside would be to enter a partial short position (preferably between 1/3rd and 1/2 the position) here with a stop against the all-time high. I’d add the rest of the position either on extreme weakness or on a break below the “neck-line”. The covers then would be the aforementioned targets.

Looking at the holdings of $ITA, I see the following listed as the top-10: $BA, $UTX, $LMT, $GD, $RTN, $PCP, $NOC, $COL, $TDG, and $TXT. I’m not going to lie- some of those names still look bullish to me. But if we were to see a market pullback here, all those names could correct a bit (some do seem ripe for a pullback) which would give the $ITA the needed push down. Again, it’s all about risk/reward for me. I like this trade to the downside at the moment than I do to the upside.

So to go back to Rosenberg’s idea: While he may be right fundamentally in the long-run (and especially right relative to gold), in the short-term, an investor/trader must be wary of this pattern.

$ITA Weekly Chart

ITA weekly

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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