Conclusion, Investment Implications, Strategy

The SPDR S&P Aerospace & Defense ETF (XAR) is beginning to outperform the benchmark S&P 500 (SPX) on a Strategic, quarterly basis amid expanding investor asset flows.  With political tensions rising in Eastern Europe, this may be a way to hedge against upcoming US broad market weakness.  A sustained rise above the 114.37 amid continued asset expansion would target an additional 20% rise to 136.82.  This is an Asbury Value trade idea.

Analysis and Rationale

In seeking to track the performance of the S&P Aerospace & Defense Select Industry Index (the “index”), the SPDR S&P Aerospace & Defense ETF (XAR) employs a sampling strategy. It generally invests substantially all, but at least 80%, of its total assets in the securities comprising the index. The index represents the aerospace and defense segment of the S&P Total Market Index (“S&P TMI”).

Relative Performance

The upper panel of Chart 1 below plots XAR daily since September 2021 along with its 200- and 50-day moving averages, widely-watched major and minor trend proxies.  The lower panel plots the daily relative performance of XAR versus the SPDR S&P 500 ETF (SPY) along with its 63-day (quarterly) moving average, the latter which identifies the Strategic trend of relative performance.

Chart 1

The green highlights in the lower panel point out that XAR has been outperforming SPY on a Strategic basis since Feb 10th.  Meanwhile, in the upper panel, XAR is edging above its 50-day moving average to suggest an emerging minor bullish trend change.

The upper panel of Chart 2 below also plots XAR daily, since October, with its 200-day MA.  The lower panel plots the corresponding daily total net assets invested in XAR along with their 21-day moving averages, which identifies a Tactical trend of either expansion or contraction. 

Chart 2

The green highlights in the lower panel point out that these assets are currently rising above their 21-day MA to suggest an emerging trend of monthly expansion, and that the previous instance of this fueled XAR’s previous rally between late December and mid-January.  Expanding investor assets are the fuel that drives a price trend.  As long as this emerging monthly trend of expansion continues, so should recent strength in XAR.

Table 1 below shows that, considering a 136.82 upside target and a protective stop placed below the 108.68 area, a long entry price of 114.50 would provide a 1:3.8 risk/reward ratio (risking $1.00 to make $3.80) with an initial risk of 5.1%.

Table 1

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Please consult the table showing our Asbury 6 key market metrics to help determine if this investment is suitable for you.