Schaeffer's Market Observation Features Lockheed Martin and United Industrial Corporation.

CINCINNATI -- Among the stocks featured in this Schaeffer's Market Observation are Lockheed Martin (NYSE:LMT) and United Industrial Corporation (NYSE:UIC). This article is just one of the many free market commentaries written every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research.

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Portfolio Defense, Part II: Defending Their Honor

Technical and Sentiment Analysis of Defense Companies

Yesterday, I took a look at two bearish plays in the defense sector in Portfolio Defense. Today, I am going to prove that I can look at the glass as half full, as I look at two AMEX Defense Index (DFI) components with a Schaeffer's Equity Scorecard rating of 7.0 out of a possible 10.

If you read yesterday's analysis, you will remember that DFI is a strong performer, outpacing the S&P 500 Index (SPX) on a monthly basis.

Lock, Stock, and Barrel

According to Hoover's, Lockheed Martin (NYSE:LMT) is the world's top-rated defense contractor. Across the company's various divisions, LMT produces F-16 and F-22 fighters, missile and submarine warfare systems, radar, satellites, strategic missiles, communication systems, and reconnaissance/surveillance systems. What's more, NASA announced on Thursday that it has chosen LMT to develop the Orion Project crew capsule, which is a $3.9-billion assignment marking a big push into interplanetary travel.

One would think that a major government contract would be enough to send a stock rocketing (sorry about the pun, it was too obvious). However, the stock simply overtook its 10-day and 20-day moving averages. Some companies may think that this is a major development, but it is just a continuation of LMT's solid performance. Notice that the shares have spent a majority of 2006 advancing along the support of their 10-week and 20-week moving averages. Although this support faltered a bit, the former recently completed a bullish crossover of the latter. This technical formation often suggests that further upside will be seen. In addition, the stock currently enjoys the support of the 82 level, which has propped it up during the past three-plus months.

In order to get a full taste of LMT's success we need to look at a monthly performance chart. Since May 2004, the equity has moved higher along the tandem support of its 10-month and 20-month moving averages. Dropping to the support of these trendlines would mark a sizeable decline, but potential support at the round-number 80 level would have to fail.

Watch the 80 level, if the stock drops to test its support and it holds, the pullback could be a nice entry point for a bullish position. However, a breach of this support would send the shares spiraling to the support of their 10-month and 20-month trendlines. This kind of a drop may be more than some investors (and their portfolios) can stomach. There is little in the way of short-covering support to help buoy the shares, which concerns me. Despite a 39-percent jump in short interest, one percent of LMT's float is sold short, and it would take 1.5 days to cover these shorted shares.

Turning to analysts, Zacks reports that LMT receives seven "strong buys," one "buy," seven "holds," and one "sell." This sentiment isn't necessarily what we would like to see from a contrarian standpoint, but the eight "hold" or worse ratings could easily become "buy" or better, which could help the stock lift off.

Sentiment from the speculative options crowd does allow a bit of a chance for LMT to move higher. The space ace's Schaeffer's put/call open interest ratio (SOIR) of 1.10 is higher than 69 percent of those taken during the past year. If this bearish sentiment unwinds, a bit of buying pressure could push LMT higher.

Bottom line: LMT receives a Schaeffer's Equity Scorecard rating of 7.0 out of a possible 10, which indicates that LMT could be ready for lift off.

Is it UIC?

Let's turn our focus to United Industrial Corporation (NYSE:UIC). According to Hoover's, (through a subsidiary) UIC makes automatic test equipment for avionics, electronic warfare test and training systems, training simulators for combat systems and aircraft maintenance, and unmanned aerial vehicle systems. The U.S. military accounts for most of UIC's sales.

In May, UIC posted earnings that missed the consensus estimate by a nickel. This news sent the shares reeling, falling to a year-to-date low in late July. Since this near-term low, the stock has marched steadily higher, claiming the support of its 10-week and 20-week moving averages. Moreover, this move higher has pulled UIC's 10-week moving average to the verge of a bullish cross of its 20-week counterpart. Should this move come to fruition, it could signal a continued uptrend.

UIC's long-term performance is more impressive. The shares have advanced steadily along their 10-month and 20-month moving averages, which have been in place since June 2003. Yes, the shares have pulled back a bit, but this tandem support has not been breached, and the pullback could be seen as an excellent entry point for a bullish position. One concern I have is the 55 level, which could act as resistance.

Although UIC and LMT both boast a Schaeffer's Equity Scorecard rating of 7.0, I am a bit more bullish when it comes to UIC. One of the reasons is that the speculative options crowd is more bearish about UIC. The company's Schaeffer's put/call open interest ratio of 1.40 is higher than 83 percent of those taken during the past 52 weeks. Again, if this bearish bunch turns bullish, there could be considerable buying pressure, which could push the stock higher.

Meanwhile, short sellers and their pessimistic feelings provide ample fuel for a substantial short-covering rally out of UIC. During August, short interest increased by 12 percent, resulting in 14 percent of the firm's float sold short. Moreover, it would take 4.5 days at UIC's average daily trading volume to buy back these shorted shares. As previously stated, this combination could provide the means for a short-covering rally.

Analysts pay little attention to UIC. According to Zacks only three analysts cover the company, all of which rating it a "buy" or better. While this configuration leaves room for downgrades, it also leaves room for fresh positive coverage to help push the equity higher.

So, is the best offense for your portfolio a good defense? I am more bullish on UIC than on LMT; however, both of these companies present bullish opportunities for your portfolio.

Click the following link to see weekly and monthly charts of LMT and UIC: http://www.schaeffersresearch.com/wire?ID=17284 .

Take advantage of the timely Schaeffer commentaries by signing up for their free e-newsletters -- Opening View, Market Recap and Monday Morning Outlook. Click here to have the Schaeffer's commentaries delivered to you free via email every day and get entered to win an iPod Nano. http://www.schaeffersresearch.com/redirect.aspx?CODE=PROAW13M&PAGE=1 .

About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method .