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Cigarettes: The "Armageddon Trade"

Posted: Sep 16, 2009 13:26 PM by Joey Fundora

Tickers in this Article: LO, RAI, PM, MO

Buying cigarettes, ammunition and toilet paper has been referred to as an "Armageddon trade" because in the case of a true breakdown in civilization, these items would hold more value for bartering than gold coins. While there were many who feared the end of the world at the height of last year's financial meltdown, in the end, most of these fears were laid to rest. However, Armageddon stocks are doing well. Recently, the cigarette stocks have made a little move of their own, and could be a group to watch as a defensive play if the markets turn sour again.

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IN PICTURES: 7 Tools Of The Trade

Altria Group Inc. (NYSE:MO) for instance, recently cleared a base it had been building over the past several months. The high $16s were acting as resistance between January and June, before finally succumbing to the bulls in late July. MO acted well after the breakout by consolidating tightly above a breakout area. It followed through a few weeks later, and is currently trading at a several-month high. (For further reading, check out Industries That Thrive On Recession.)

Source: StockCharts.com

Philip Morris Intl. (NYSE:PM) also cleared a several-month-long base in late July. While it consolidated tightly above the breakout range like MO, it hasn't yet followed through with a move above the post-breakout trading range. MO is wedged between two important levels. A move above $48.63 would signal a follow through on the breakout, while a move below $45 could be a sign of failure.

Source: StockCharts.com

Reynolds American (NYSE:RAI) is a cigarette maker that leaves no question as to the existing pattern. RAI broke above a several-month base in July, and has continued to rally, finding support on a rising 20-day moving average. While RAI may continue to consolidate some of the recent gains, the key levels to watch are the top of the prior range near $40, and the recent high near $46. (For more, see Guard Your Portfolio With Defensive Stocks.)

Source: StockCharts.com

Lorillard Inc. (NYSE:LO) is another cigarette maker that has been steadily rising over the past few months. LO cleared a choppy base in May, before settling into another consolidation that took place for about three months. LO continued to move higher in July and August, peaking at $77.52. It appears that LO is working on building another lateral base, and the key levels to watch are the August high and the bottom of the trading range near $70.

Source: StockCharts.com

Bottom Line
While the Armageddon trade is mostly a comical reference, the cigarette sector has managed to remain in decent shape on the long-term charts. Despite all the social pressure against this group, cigarette makers have managed to weather most of the storms, and could be a group that investors turn to if the economy starts sliding again. Most cigarette smokers will not quit for monetary reasons, providing cigarette makers with some inherent resistance to a recession. (For related reading, check out A Prelude To Sinful Investing.)

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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

By Joey Fundora

Joey Fundora is an independent trader located in South Florida. Joey focuses on using technical analysis techniques to uncover supply and demand imbalances in equities. To see more of his work, visit his site on Stock Chart Analysis.

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