'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.'
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.
Northrop Grumman NOC, -1.01%, Raytheon RTN, +0.58%, Lockheed Martin LMT, -0.90% and L3 LHX, -0.54% are each more than three standard deviations above their 50-day moving average. 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. Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. Be sure to check the Need to Know item. The emailed version will be sent out at about 7:30 a.m. Eastern.Steve Goldstein Steve Goldstein is MarketWatch markets editor for Europe. Follow him on Twitter: @MKTWgoldstein.
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