What Big Money Thinks About Spy Balloons – And What It Tells Us About Where to Invest

It sounds more like a movie plot than a real-life headline event.

Like … maybe a plotline for Top Gun 3 … where Tom Cruise and his trainees kick in the afterburner in to blast a spy balloon out of the sky before it can reach Area 51.

“Maverick” and company didn’t do it, but U.S. fighter jets did shoot down China’s spy balloon on Feb. 4.

That’s not a frequent incident, so it never occurred to me we’d see more.

But we did.

Another object flying over Alaska.

And then another over Canada.

And still another over Lake Huron.

Officials are still analyzing those last three. But we know the first one was a spy balloon sent by Beijing. U.S.-China tensions have grown flinty since a Sidewinder missile blasted that espionage gas bag out of the sky and into the ocean off the South Carolina coast. U.S. Secretary of State Antony Blinken canceled a trip to China, and Washington and Beijing have been trading accusations ever since.

In Europe, meanwhile, Russia appears to be planning a big and potentially bloody “spring offensive” in Ukraine. It may have already started – the most intense bombing since the start of the war has been reported in some regions.

Whether we’re talking geopolitical rhetoric or a real shooting war, global conflict is a major consideration for investors. The impact can be massive, from tragic human suffering to economic devastation, supply-chain disruptions, and more.

Think back a year to last February … to the weeks that led up to Russia’s attack … and the weeks that immediately followed. The S&P 500 dropped 3% that month, but the iShares Aerospace & Defense ETF (ITA) jumped more than 10.5%. That’s a relative outperformance of nearly 14%.

One year later, and in light of recent tensions, let’s look at how investors are reacting now, including which stocks are hot … and which are not.

Aerospace Stocks Are Not Exactly Flying

My Quantum Edge system analyzes exchange-traded funds (ETFs) in addition to individual stocks. I don’t invest much in ETFs, but they are great proxies for indexes, sectors, and trends.

ITA jumped last February, and it has moved higher early this year. The ETF has gained 8% since its most recent lows in January.

We’ve also seen two Big Money buy signals (the green bars) this month – one on Feb. 4, which was the day the first balloon was shot down, and an even bigger one this week on Valentine’s Day.

The Big Money buys are important, and the ETF’s Quantum Score is 62.1. ETFs tend to have lower scores because they have a lot of stocks in them, including weak ones. So for an ETF, that’s a decent score.

My algorithms analyze both technicals and fundamentals to arrive at a Quantum Score for stocks and ETFs. A Quantum Score in the low 60s is rarely strong enough to trigger my interest. There are better moneymaking opportunities out there – but this week’s “buy” signal bears watching.

The largest holding in ITA is Raytheon Technologies (RTX), which constitutes a hefty 21% of the ETF. Raytheon makes the Sidewinder missile used to shoot down the flying objects, but we do not see heavy buying yet. The last signal was back on Jan. 6, and the stock is trading near where it started the year.

With a Quantum Score of 55.2, Raytheon is also not strong enough to rate a buy.

The next largest holding in ITA is Lockheed Martin (LMT) at 16%, so it and RTX constitute nearly 40% of the ETF. That’s a big weighting for just two stocks, and LMT tells much the same story.

LMT is flat so far this year. And we have seen no unusual buying signals in 2023 – just some sell signals (red bars) in January. I’ll be watching to see if buy signals do pop up given the stock’s recent strength.

LMT’s Quantum Score is 58.6, three points higher than RTX. The two companies have identical Fundamental Scores of 54.2, due primarily to lackluster sales-and-earnings growth.

The One Standout

The most interesting company in ITA right now is Boeing (BA). As I’m sure you know, it is more than a defense company. It’s a global leader in commercial jetliners. Lockheed Martin and Raytheon are not.

Recent aircraft orders have helped drive Boeing’s shares higher. And, just this week, Air India said it would buy 220 jets from Boeing and 250 jets from arch-rival Airbus, with options for more. That makes it the biggest purchase in commercial aviation history and gives the sector a nice tailwind (so to speak).

Honestly, Boeing is a bit of a conundrum as an investment. Its Technical Score is a robust 73.5, thanks to its 25% rally the last three months and Big Money’s buying since last November.


Editor, Jason Bodner’s Power Trends