-The air is pretty thin up here for the ITA and components.
-Recent breaches in public trust could further act as a catalyst for shifting sentiment.
-BA is not only leading in this sector but a broad market leader.
Trust is a key component in the Aerospace Industry, but we also look at key components of the iShares Dow Jones US Aerospace & Defense Index (ITA).
Boeing (BA) has been in the news a lot in recent months with the grounding of its 737 Max jets following safety concerns after the crashes of Ethiopian Airlines and Lion Air. While BA is working on a software fix, it seems that even after all the "MCAS" issues are technically worked out and signed off on by the FAA, sentiment on BA might continue to sour. It really seemed to have violated public trust. There have already been more than a few articles hyper-critical not only of BA but also the FAA. Boeing appears to have gone to great lengths in order to keep enough of the dated 737 the same, so that pilots did not need new simulator time before being able to fly the new Max. The FAA has two mandates: 1) Make air travel safe 2) Promote air travel. Its cozy relationships with airlines and manufacturers in pursuit of goal 2 may have tempted it to overlook some issues and allow corners to be cut.
But I fear BA might be just the tip of the... Jumbo-Jet.
Grounding the 737 Max 8s and 9s was the right decision until a proper fix is implemented and tested and tested again. And then when the company is done testing it, it should test it again! (To paraphrase Dustin Hoffman) But we are already starting to see the knee-jerk over-reactions to other incidents. Following a crash of a Lockheed (LMT) F-35 in Japan, the company immediately grounded the rest while investigating. While I still feel that data still show that air travel is safe, there are fractures in the public trust now that will take some time to mend. The problem is if anything else starts to provide turbulence there could be a real sudden change in cabin pressure.
Several airlines have already canceled orders for 737 Maxes. The ripple effects of canceled flights by airlines and customers alike will likely not truly be seen until later this quarter. I think some journalists will continue to dig and uncover questionable actions from manufactures and the FAA. And I think we are likely to see some lawsuits pile up. Additionally, to compensate, the pendulum at FAA and other similar world administrations might swing drastically the other way. Making the process and structure of safety approval and maintenance requirements far more strict and even onerous for smaller players.
All of this fundamental speculation is great but most of you are here for the charts. So let us dive into the ITA and some of its key components by market cap.
Most like the market still trying to form B-wave tops most clearly are Raytheon (RTN), Northrop Grumman (NOC), and General Dynamics* (GD). Some are just now topping in the top of Primary Wave 3 (or equivalent); in addition to BA in this group, we also have Harris (HRS), TransDigm (TDG), and LMT and United Tech (UTX) can count either way but both "toppy." Looking beyond these larger caps few others allow for a bit higher, but some could be even more bearish.
*GD and SPR might have the most s/t potential for higher if cited supports hold, but this entire sector is very risky given the clear shifting of investor and public sentiment.
Disclosure: I am/we are short BA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.