Trading in the clouds

●Aerospace and defense stocks have recently outperformed the broad market

●Boeing’s (BA) rally has pushed it to the top of a broad trading range


Many aerospace and defense companies have been flying very friendly skies lately, with some of the ETFs based on these stocks pushing to multiple all-time highs in recent weeks, and several high-profile individual names breaking out of consolidations and/or pushing toward record levels.

Over the most recent week, in fact, aerospace and defense (+4.47%) has been the strongest portion of the S&P 500 (SPX) industrials, which itself has been the strongest sector in the big index for the past month.

Boeing (BA), 10/5/17 – 9/19/18. Boeing (BA) price chart.  Another run at the highs

Source: OptionsHouse

Boeing (BA) has done its share by notching gains six out the past seven days, topping $370 and getting to within shouting distance its all-time high of $374.48 set in early June. The chart above shows BA’s latest upswing pushed it toward the top of the broad trading range it’s been in most of the year. (Also, the past five swing lows in that range—in March, May, June, August, and September—have occurred at successively higher levels, suggesting that bulls maybe have been a little more aggressive than bears within the confines of that range.)

And yesterday, when the stock gained more than 2% intraday, options traders were putting up sizable volume in BA options, as shown in the following LiveAction scan:

OptionsHouse LiveAction scan: Total Options Volume, 9/19/18. Heavy BA options trading

Source: OptionsHouse

Traders positioning themselves for an upside breakout and new highs, or another retreat from the upper boundary of the trading range? Could be both, actually, depending on the time horizon.

Boeing is next scheduled to release earnings on October 24, and over the past couple of years it has solidly beat its headline numbers.1 And although many investors may associate Boeing more with commercial aircraft, in late June (right after a particularly sharp decline) the company made headlines for winning a $1.5 billion Pentagon contract to build fighter jets for Kuwait.2 With sustained broad-market tailwinds and continued sector strength, bulls could make a case for an upside breakout and longer-term follow-through.

But momentum ebbs and flows, and rotation is often the name of the sector/industry game—and with BA approaching technical resistance after a seven-day, 8% rally, some bulls may think the stock could first descend to a lower altitude before it attempts to push above the clouds.

That doesn’t necessarily mean another return to the range’s lows, but some traders may anticipate a test of a recent breakout level—say, the July high around $364.50 or the August highs around $356.

Blue skies can be enticing, but traders always need to consider how and when they’re going to take their positions in for a landing.

Market Mover Update: LGI Homes (LGIH) dropped more than 2% yesterday, keeping pressure on its near-term support level. Yesterday’s monthly Housing Starts report showed more starts than expected, but housing permits declined 5.7%—well below estimates.

November crude oil futures (CLX8) rallied more than 1.5% yesterday, closing at their highest level since July (above $70/barrel).

Today’s numbers (all times ET): Existing Home Sales (8:30 a.m.), Leading Indicators (10 a.m.).


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1 Boeing (BA) earnings. 9/19/18.

2 Reuters. Boeing wins $1.5 billion U.S. defense contract: Pentagon. 6/27/18.