Why it may be too late to chase defense stocks as Iran strikes U.S. bases
Traders certainly have shown no reticence to profiteer from U.S.-Iranian tensions.
Since December 27, when a rocket attack killed an American contractor in Iraq, the aerospace and defense sector has been the best performing S&P 500 industry group, according to analysts at research service Bespoke Investment Group.
Historically, when aerospace and defense stocks make that big a move without doing so in the prior three months, returns are typically weak—Northrop Grumman, for example, has underperformed by 11.8 percentage points when similarly overbought, compared with its typical move. Defense stocks are also at the top of Bespoke’s overbought industrials list.
“In summation, while the U.S./Iran fight over the past couple of weeks has sent aerospace and defense stocks flying, we would caution against jumping on this momentum trade at this point because downside mean reversion usually occurs after the group gets this extended,” they advise.
The focus was on Iran launching missiles at two bases in Iraq with U.S. forces, which didn’t cause any American casualties. The good news in a sense was that Iran stated that was the extent of its retaliation for the killing of top general Qassem Soleimani.
A 3-year-old Boeing BA, +1.06% 737 airplane—not the 737 MAX aircraft that crashed twice and has been grounded—suffered a fatal crash shortly after takeoff in Tehran en route to Kyiv, killing all 167 passengers and nine crew members on board. Ukraine’s embassy in Iran initially said technical problems were at fault but then deleted the statement.
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