The PowerShares Defense And Aerospace ETF (AMEX: PPA) is lagging the market's rebound, making it worthwhile watching as things heat up in Iraq.

If the situation in Iraq gets hotter as the U.S. tries to consolidate power in the area before the end of the Bush presidency, it would seem to benefit defense and aerospace companies.

Yet, despite reports of rising violence in Iraq, and rising tensions with Iran, PPA remains dormant. The fund remains some 17% below its September 2007 high, having topped out a full month before the S & P 500, which is down 11.5% from its October 2007 high.

It's hard to correlate reports of rising tensions with poor performance from this sector, which suggests several things:

One would be that the reports have little substance to them. Another would be that the reports are so obscure that big money players have yet to hear them. While a third option would be that the big money is busy trying to hold itself together as it reels from the effects of the subprime mortgage crisis.

If any one of those scenarios is true, then the lackluster performance of the defense sector makes sense. A more interesting scenario, though, would be that the big money is expecting the U.S. to scale down operations in Iraq at some point in the future, and that demand for defense products may start to decline to something less than it was at the peak of the offensive.

In other words, the defense stocks might be sending a message that Iraq's most demanding days may have passed. And that's as surprising as any other scenario, and is worth taking a step back and giving the whole thing some thought.

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He is the author of four books: "Futures And Options For Dummies," "Successful Energy Sector Investing," "Successful Biotech Investing" and co-author of "After-Hours Trading Made Easy."

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