Time to Buy Aerospace and Defense StocksVIEW IN BROWSER
By Jeff Clark, Editor, Market Minute Rip Van Winkle says it’s time to buy aerospace and defense stocks. Of course, it’s understandable that readers may not want to follow the investment advice of a fictional character who took an extended nap and woke up to a changed world. But, the old man has put together an impressive track record over the past year. Rip Van Winkle bought energy stocks last November just before the sector rallied 44% in four months. He bought software stocks in February during the AI-inspired software crash. IGV – the software sector ETF – gained 38% over the next four months. And, in May, Rip told us to buy into the medical device sector. That led to a 38% gain in IHI – the medical device sector ETF – in only three months. Now, the old man has his eyes on the aerospace and defense sector. Let me explain… A “Rip Van Winkle trade” is where a stock or a sector has been so beaten down, so utterly demolished, so crushed to the point of absurdity that the laziest of traders need only buy the stock, or sector, and then go take a nap. We’ll wake up several weeks later to a changed world – and to a profitable situation. We’ve highlighted three such trades over the past year. Today, we’ll take a shot at number four. Take a look at this ratio chart comparing the action in the S&P Aerospace and Defense fund (XAR) to the S&P 500… 
When this chart is moving higher, the aerospace and defense sector is outperforming the broad stock market. When this chart is declining, XAR is underperforming. Relative to the S&P 500, XAR is at its lowest level in the past year. To put it another way… despite military conflicts around the globe, a huge increase in the US defense budget, and rapid growth in the area of space exploration, the aerospace and defense stocks are cheaper today than they have been at any time in the past year. Of course, that doesn’t mean the sector has to rally from here, or that it can’t fall even further. But, if the main strategy of investing is to “buy low and sell high.” Buying into the aerospace and defense stocks at current levels meets the first criteria. The proverbial “rubber band” for the sector is stretched quite far to the downside. It is set up for a “snap back” move. The timing of that move is uncertain. But, the risk/reward setup is favorable enough to allow some patience for it to play out. I suspect most aerospace and defense stocks will be trading higher a few months from now than where they are today. If you’re willing to buy into the sector, and then go take a Rip Van Winkle-style nap, you should be pleasantly surprised when you wake up.
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Best regards and good trading, 
Jeff Clark
Editor, Market Minute |
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