AEROSPACE/DEFENSE STOCKS COME UNDER PRESSURE -- LOCKHEED MARTIN IS BIGGEST LOSER -- HOW TO PLOT RELATIVE STRENGTH RATIOS

LOCKHEED MARTIN LEADS DEFENSE STOCKS LOWER... Aerospace/defense stocks ave been among the year's top performers. Not anymore. The group has been losing ground lately, but is being hit especially hard today. The biggest loser is Lockheed Martin. Chart 1 shows the stock gapping down to a two-month low. It's shattered the (blue) 50-day moving average and may be headed toward its 200-day line. The big red volume bars reflect substantial distribution since the start of the month. [In an uptrend, downside corrections should take place on light volume. Declines on heavy volume are usually bearish]. Notice also the big drop in its relative strength line since the start of December. That has turned the stock from a market leader to a market laggard. Chart 2 shows the last year's trend for LMT. The first blue arrow shows the stock becoming a leader during March; the second arrow shows the ratio having peaked. Chart 2 also shows the stock price threatening a rising (green) support line extending back to March. Other stocks in the group are falling today as well.

Chart 1

Chart 2

NORTHROP GRUMMAN AND BOEING STARTING TO UNDERPERFORM ... Although the damage to NOC and BA is less severe, both stocks are starting to lose their leadership role as well. Northrop Grumman is trading under its December low at 55 and is threatening its 50-day average. A close under 55 would also put the stock below its July peak (see circle), which would be another sign of weakness. Here again, the volume bars reflect fairly heavy selling during December. Of more importance is the apparent top in its relative strength line. After failing to exceed its July peak, the ratio line appears to be breaking down. That means that money is rotating out of the stock and the group.

Chart 3

Chart 4

BOEING FORMING DOUBLE TOP?... The chart of Boeing isn't as bad as the other two stocks shown, but doesn't look good either. Its inability to break through its September peak sets up the possibility that a "double top" reversal pattern is forming. To confirm that bearish view, however, the stock would have to break its October low near 48. A second alternative is that the stock is entering a sideways trading range between its September high and its October low. A decisive close under its December low at 52 would turn its short-term trend lower. Its relative strength line peaked in September and is still dropping. Which is why it's always a good idea to keep an eye on the relative strength rankings. That was right around the time that the rest of the market started to strengthen. Apparently a lot of investors decided to stop playing defense and start playing offense.

HOW TO PLOT RATIO CHARTS ... I generally like to plot a relative strength ratio line under my stock and sector charts. It's very easy to do. After you've plotted a chart, go to the Indicator Windows and click on Price Relative. That will show you a ratio of a market divided by the S&P 500. By typing over $SPX, you can change the denominator to any other index you wish like the Dow or the Nasdaq. When looking at stocks within a group, you can also make the group index the denominator. That way you can see which stocks are leaders in a rising industry group or sector. You can also compare two group indexes or two different stocks. Relative strength ratios are very flexible and useful. You can also plot a ratio in a chart by itself. Chart 5 plots the same Boeing/S&P 500 ratio shown at the bottom of Chart 4. It's done by typing BA:$SPX in the symbol box (the numerator symbol:denominator symbol). The advantage of plotting a ratio by itself is that it enables you to apply technical indicators to the ratio. Chart 5, for example, shows the BA:$SPX ratio breaking its 50-day average during September which could be interpreted as an early sell signal. The ratio is now threatening to break its 200-day line. Notice the downtrends in the RSI and MACD lines as well. You can even plot point & figure ratios

Chart 5

Chart 6

RATIO P&F CHARTS ... Chart 6 is a point & figure chart of the Boeing/S&P ratio shown in Chart 5. It's been on a sell signal since early December when a column of o's fell below a previous o column (the red letter c marks the start of December). The red zeros show today's drop which is threatening to break even more support levels. You can adjust the box size to make the chart more or less sensitive. The box size in this chart is based on percentage changes. I encourage you to spend time learning how to plot and track relative strength ratios. Although I try to point out significant changes when I see them, there's a lot that I don't get to. There's no reason why you can't do a lot of that yourself. You'll also start getting a lot more value from your Stockcharts.com service.