"The recent market volatility has shaken more than a few traders, leaving them wondering where they should turn next to protect themselves," notes Jocelynn Drake.

But one sector, she notes, that has performed well and should continue to do so, is the defense sector. In particular, the analyst with Schaeffer's Investment Research considers L-3 Communications (NYSE: LLL) and FLIR Systems (NASDAQ: FLIR) as "shining gems."

Drake notes, "Topping the list is L-3 Communications, which makes secure and specialized systems for satellite, avionics, and marine communications such as flight recorders (black boxes), display systems, and wireless telecom gear."

On July 26, she notes, the company reported a second-quarter profit of $1.49 per share, beating the consensus estimate by a nickel. Revenue for the quarter jumped 11% to 3.41 billion. Adding to its good news, she notes, was that L-3 boosted its 2007 earnings outlook.

She explains, "The stock has been a leader within the sector, gaining more than 21% since the beginning of 2007. Yet, we continue to see heavy amounts of skepticism from investors despite the firm's impressive technical and fundamental performance."

Drake points to short-term options speculators, who have loaded up on put positions and short sellers. She says, "This accumulation of bearish bets represents a healthy buildup of potential buying power that can help fuel further gains in the shares should the bears begin to unwind their positions."

Drake also points to FLIR Systems, which creates thermal imaging and obscurant-proof camera systems that can detect heat and radiation, thus allowing operators to see objects through fog, darkness, or smoke.

She explains, "FLIR's imaging products enhance vision for military and commercial applications such as search and rescue, drug interdiction, border patrol, surveillance, navigation, and newsgathering. The various U.S. government agencies collectively account for about 32% of the firm's sales."

She notes that the company reported earnings on July 25 of 38 cents per share on a 33% jump in sales to $184.3 million. Analysts had forecast a profit of 36 cents per share on revenue of $170 million.

She observes, "Wall Street has largely shrugged off the strong performance. Zacks reports that FLIR has received 7 'hold' ratings and 2 'sells' out of a total of 13 analyst ratings. This leaves ample room for potential upgrades."

She adds, "Short sellers are also trying to call a top to FLIR's uptrend. Should the bears begin to buy back their pessimistic positions, it will give the security an additional boost."

Each day, Steven Halpern's TheStockAdvisors.com features the latest investment ideas and market commentary from the financial newsletter community.