US defence sector pullback

At Tricio we focus on economic cycles, market structures and investor behaviour in order to help clients navigate markets with a medium to long-term investment outlook. We often use charts as a gauge of investor sentiment and behaviour.  

We advocated defence shares for client exposure in late 2021 as Russian tensions with Ukraine increased. Our view which we expressed to clients in meetings, webinars, research papers and blogs, was that countries have a duty to protect themselves, and defence share exposure could be considered by most investors.

The short-term chart of ITA below (iShares U.S. Aerospace & Defence ETF, weekly chart with 13 and 50-week moving average, semi-log) serves as a proxy for US names in this sector. The big holdings in the fund are GE Aerospace, RTX Corp, Boeing, General Dynamics, L3Harris Technologies, Lockheed Martin, Northrop Grumman, Transdigm Group, Howmet Aerospace and Axon Enterprise.

Of note was the pullback from the high set just after the war in Iran started, and then the tumble in the ETF price since then. At one point the ETF saw a correction of over -15% from the recent peak. Market practitioners will be familiar with the adage that it is better to travel than to arrive (apologies to Robert Louis Stevenson), or ‘buy the rumour, sell the fact’. In other words, investors have backed this sector (the ETF has over $13 bn in AUM) ahead of the conflict, then took some profits as the war started.

The long-term chart of ITA (below) shows the risk here. We would anticipate that the 50-week moving average near $205 would offer support ahead of the big figure $200 area. This would be a near -20% tumble from the $250 high area, if approached. But if this area is lost on a sustained basis then the flat horizontal support line, former resistance, near $119 would be seen as pullback risk. This is near the rising red long-term support line. Again, we don’t anticipate such a deep tumble, but the risk is clear.

For now, on a long-term view, the pullback in the ETF may draw out buyers over the coming weeks, but watch the 50-week moving average and $200 zone as support to hold. Regaining the 13-week moving average (near $233 now) would be seen as a positive trend signal if seen. Given the potential renewed expenditure by the US and other countries for defence considerations, new highs in this ETF this year seems likely.

For those looking for a UCITS fund in this sector, VanEck launched their Defense UCITS ETF in 2023 (DFNS, weekly chart below, semi-log with 13 and 50-week moving average). The top holdings are RTX Corp, Thales, Leonardo, Hanwha Aerospace, SAAB, Elbit Systems, Curtiss-Wright, Palantir, Leidos Holdings and Singapore Technologies Engineering.

The ETF had a -15% pullback from the recent peak to the March trough as well. Watch the 50-week moving average and historical chart support around the $61/$58 area as approaches to this zone need to draw out buyers (demand). Failure to hold this area would leave a deeper pullback to the April 2025 lows near $37 at risk if seen. Here too, favouring the corrective pullback to be followed by new highs in time, given the long-term trend in defence spending needs in Europe.

For further information on our research insights and our ‘Ask a Buddy’ CIO service please contact us at info@tricio-advisors.com 

Gerry Celaya,

Chief Strategist