The defense stocks could very well continue to work their way higher, quite likely within that rising wedge or even beyond. However, it appears to me that as the sector had already rallied 30% from the Feb ’16 lows up to the election & then jumped another 18% since then, that most if not all (and then some) of any near-term benefits from increased defense spending has most likely already been priced in. To me, it’s a case of over-valuation, maybe fair valuation at best but at certainly not under-valuation, as I prefer when investing in long-term positions) coupled with what appears to be bearish technical developments that warn of a likely correction. I plotted the trailing P/E ratio of the some of the largest defense stocks (BA, UTX, LMT, GD, RTN, etc.. going back a decade & valuations on all are at or near the high-end of their ranges.

I’m not short the defense stocks, at least not at this time but I’d rather watch them run another 20% higher without me than go long a sector when I can’t make a compelling case to buy at these levels. That is were I differ from many traders that are momentum traders & might be fine buying the defense stocks here since the trend is clearly bullish at this time. Should the sector pull back to either of my price targets & the charts appear to be firming up at that time, I might look to position long in some individual defense stocks and/or one of the sector ETFs.