Playing Stock Defense by Getting Short the Defense Stocks

and Parabolic Gold?

My chart review after today's market close keeps my bearish stance on the stock market and surfaced a group that I believe to be ripe for new short positions. The Aerospace and Defense sector is looking weak and this jives with the expected scaling down of the military in Iraq and Afghanistan expected in the future. As the stock market tries to predict the future, and as the future supposedly holds a reduction in military efforts abroad, the orders for military equipment by the U.S. Government should be tailing off. It looks like the investors in these companies are starting to rotate out of this area.

According to the charts Northrup Grumman Corp. (NYSE: NOC), Lockheed Martin Corp. (NYSE: LMT) and Precision Castparts Corp. (NYSE: PCP) all look weak. To find a common denominator here I did some searches on the F-35A Joint Strike Fighter and found that foreign buyers from The U.K. to the Dutch have been cancelling orders for the plane. Lockheed Martin is the main producer of the F-35A with Northrup Grumman being a major parts supplier. Precision Castparts produces many of the high tech metal alloy parts for fuselage and jet engine production. The F-35 has run into many cost overages (go figure) and this has led to the firing of the General in charge of the program in February.

It would be too simplistic to base shorting these stocks just on the drop in orders for the F-35. If you consider the F-35 program is one of the biggest dollar amount military orders in years and the fact that IF the drawdown in military activity abroad follows the timelines that have been laid out, earnings for the Aerospace and Defense sector will take a hit. The customers for military manufacturers are governments and governments worldwide these days are running huge deficits. I doubt Lockheed has an iPhone program in the works that will replace these orders.

All three of these stocks are in downtrends, are below their major moving averages and look like they are going lower. It looks like these is selling going on as the smart money exits a sector that has no reason to see orders grow in the future.

A few words on gold...

Today on CNBC, Dennis Gartman stated that he thinks gold could go parabolic. Gartman, a commodities guru, also said he does not believe the public is in gold and that the majority of the holders in the SPDR Gold Shares (NYSE: GLD) are institutional investors who are all long term gold bulls. Fast Money talking head Joe Terranova disagreed with Gartman but as long as I have watched CNBC, Terranova has been consistently wrong on gold. Also, today I found an article stating the Royal Bank of Scotland (RBS) Credit Chief Andrew Roberts is advising clients that he thinks the Fed will start a massive quantitative easing program by pulling the levers on printing presses and effectively devaluing the dollar.

I have long held the view that nations worldwide will start a devaluation strategy for their currencies in order to capture export related jobs. By making their currency cheaper a government will make their exports cheaper and more price competitive. When multiple governments start to fight for export related jobs in this way we will see a worldwide currency spiral lower and this will jack the price of gold higher and higher. This move may take awhile to materialize, but if it becomes apparent governments are playing this game, gold will go parabolic.

June 28, 2010 7:05 P.M.