Middle East Conflict May Be at Hand but Now Isn't the Time to Buy Defense Stocks

NEW YORK (TheStreet) -- Investing in defense stocks such as General Dynamics (GD) , Lockheed Martin (LMT) and Northrop Grumman (NOC) is a logical strategy if you believe that the U.S. will be in a prolonged war against ISIS. However, given the significant gains these stocks have had since 2012, investors should put this strategy on hold.

President Obama has formed a coalition in a potential prolonged war against ISIS. The air strikes that began on Monday in Syria are likely to continue for a considerable time. This should lead to an increase in defense spending. However, weekly charts for these defense stocks suggest that increased spending may already be priced-in, as shares set record highs.

Shares of General Dynamics, Lockheed Martin and Northrop Grumman set all-time intraday highs on Friday moving with the Dow Jones Industrial Average and the S&P 500 which also set all-time highs the same day.

Many analysts are advising investors to buy defense stocks now, but the weekly chart for Lockheed Martin shows the risk that a defense stock bubble could pop sooner rather than later. Investors who lost money following the popping the tech bubble in March 2000 will clearly see the inflating parabolic bubble for shares of Lockheed Martin.

Courtesy of MetaStock Xenith

The Weekly Chart for Lockheed Martin: Looking from the lower left to the upper right Lockheed Martin has been one of the best stock investments since the end of 1999.

The company benefited from increased defense spending following the Sept. 11, 2001, terrorists attacks. That rally stalled in mid-2002 followed by weakness to its 200-week simple moving average (green line) in March 2003. This was around the time U.S. troops began their trek to Baghdad, hence the prospect of increased defense spending. Holding this key moving average restarted the stock's upward path.

Lockheed traded as high as $120.30 in August 2008 then plunged during the crash of 2008. The stock traded as low as $57.41 in March 2009, down 52% with the S&P 500 down 58% over the same time horizon.

Note that the stock stayed below its 200-week simple moving average from November 2008 until the beginning of 2012. When a stock closes back above this key moving average technicians call it a "breakout".

Since the breakout Lockheed Martin began what's called a momentum run as the parabolic bubble seen in 2013 and 2014 began to inflate. The stock set an all-time intraday high at $181.22 on Sept. 19.

You never know when a bubble will pop, but when it does a painful decline occurs. Note that the downside risk to the November 2008 high is 34%. The risk for the S&P 500 under the same analysis is 22%.

Shares of General Dynamics and Northrop Grumman have chart patterns similar to Lockheed Martin.

Investment Strategy: If you are long these stocks book some profits now or at least cut your position in half. If you wish to buy these stocks wait for share price weakness.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates LOCKHEED MARTIN CORP as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate LOCKHEED MARTIN CORP (LMT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, good cash flow from operations, growth in earnings per share, increase in net income and notable return on equity. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

You can view the full analysis from the report here: LMT Ratings Report

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