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How to Trade Defense Stocks After President Biden's ‘Skinny' Budget

Kevin Lamarque | Reuters

Defense stocks were under pressure after President Joe Biden released his first budget request.

The budget, released Friday, called for a 16% increase in nondefense spending, but a much smaller 1.7% increase in defense spending.

While the total Department of Defense spending number itself is down only 0.4%, defense stocks dropped, although Lockheed Martin, General Dynamics and Northrop Grumman remained higher for the year.

Danielle Shay, director of operations for Simpler Trading, told CNBC's "Trading Nation" she doesn't have high hopes for the sector.

"I'm not anticipating this group to do well under President Biden. It's just simply not going to be the same environment that we had under President Trump," she said Friday.

"This is a 'buy the rumor, sell the news' [situation]. Call credit spreads up here at resistance are going to be a great options trade, and I'm looking to trade lower here, near term."

Craig Johnson, chief market technician at Piper Sandler, disagreed, arguing that a "good defense might be a good offense."

Focusing on the ITA Aerospace & Defense ETF, Johnson said "The chart looks very good. ... The size of the chart and the setup suggests that you could have mid-20s [percentage] type upside from here."

Johnson broke down the possible growth for names in the ETF.

"A lot of those charts, whether it's Raytheon or whether it's Northrop Grumman, they look like pretty attractive looking charts. This is an index that I would be buying here," he said.

The ITA ETF was up nearly 12% this year as of Friday's closing.


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