Monday, January 25, 2010

Defense as Defensive? -- A Brief Look at Lockheed Martin (LMT)

We are looking at LMT relative to the broad US stock market (using SPY as our proxy). I like the broad sweeps I see on the long-term chart above. Naturally it is hard to time those with any precision just on the basis of a long-term chart like above, but it appears that we are in the general area where it makes sense to look for support for this LMT:SPY ratio. You can see, as well, that the major turns for this ratio coincide with major turns in the broader market. The ratio's correlation with the direction of the broader market is fairly inverse, so it might make sense to view LMT from a defensive perspective.

But it is the ratio's development over the past several months that has me contemplating a major bottom.

In the latest IKN Weekly, Otto made the following comment,

I’d love to trust charts in the same way that Kyle over at Trend&Value can.

I'll leave Otto's conscious to ponder the degree of back-handed-ness in that compliment, but to my defense I don't think it is quite accurate to say that I 'trust charts'. I don't trust charts any more than I trust a phone book, or trust an almanac. If I trust anything -- and when it comes down to it I am not a very trusting (or trustworthy at times) mensch -- it is my approach to analyzing charts.

And part of my approach is to use charts (which are neither more nor less than the visual representation of historical data) to identify issues that are showing constructive consolidations and the potential for meaningful moves in the mid- to medium-longish-term (time frames are hard to predict). But often it takes months for a chart to confirm or invalidate my hunch. I thought LMT looked cheap, particularly on a relative basis, way back in October so I recommended it as a long position in the newsletter's Seven Symbol Portfolio. Over three months later the f'ing thing has gone nowhere. dead money.

In hindsight I see that I made the call on LMT back then on little more than a 'hunch'. What I should have done is put LMT on my radar and waited for a nice formation (like the one on the daily chart above) to develop. The entry price is about the same this week as in October (at least on the ratio) but we could have been employing that capital elsewhere instead of sitting on something that wasn't ready to move.

Sorry for the longwinded retrospective, I'm really just talking to myself. (While this blog is in public, it's not really kept with public consumption in mind. Think of it as my notepad...)

The upshot of this note is that we should see some confirmation on that LMT:SPY ratio sooner than later. That may mean LMT shares advance or the S&P tanks, and I'm not sure which, but the ratio is shaping up to be a chart that I 'trust'. If the ratio drops much below .65 from here then the chart betrayed me.