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Although the stock market seems to be running into a major roadblock
Wednesday, health-insurance stocks are holding up nicely. And now with the
very strong possibility that the Patient Protection and Affordable Care Act,
popularly dubbed Obamacare, may be struck down by the Supreme Court, many
of these stocks quickly scooted up to fresh 52-week highs.
The final court decision is not expected until June but that is good news
for investors. With a rising trend, a relative performance advantage and
other supporting technicals, there is still room for the bulls to run.
As for the overall market, while the Dow Jones Industrial Average, the
Standard & Poor's 500 and the Nasdaq Composite are down more than 1%
Wednesday afternoon following hints from the Federal Reserve that odds are
receding for further quantitative easing, the declines have not caused
significant technical breaks for the major indexes.
The index I find best for tracking the health insurance sector is the Morgan
Stanley Health Care Payors index, known by its options base symbol "HMO."
It consists of about a dozen stocks of companies providing health insurance
and prescription-drug benefits.
Last week, when pundits thought the court leaned toward striking down all or
part of Obamacare, the HMO index shot up to all-time highs (see Chart 1).
Chart 1
MS HEALTHCARE PAYOR INDEX (HMO)
[B-GT-Cht1-0404]
Technically, it also completed a bounce off its key 50-day moving average
and confirmed the rising trend from September 2011 to still be intact. If
the broad market's Wednesday weakness continues, the HMO index could
withstand a 5% decline without this uptrend breaking to the downside.
While the sector index is at all-time highs, some of its bigger component
stocks are not. But many do share the sector's short-term technical strength
, which suggests they can still move higher over the next two months as we
wait for the court's final decision.
The largest in the group by market capitalization, UnitedHealth Group (
ticker: UNH), enjoyed a 9.8% gain last week on healthy volume and good
momentum. Money also seemed to be flowing into the stock according to such
indicators as on-balance, or cumulative volume, which indirectly measures
supply and demand for shares.
This week, the stock is pausing and so far it is weathering the market's
Wednesday selloff (see Chart 2). What makes the current price level
interesting is that it is just below important chart resistance set by the
stock's 2007 peak. If it can hold its ground for a few more days and then
break out to the upside, it would have a clear path to its all-time high
near 64 set in 2005. It traded Wednesday afternoon at 58.80.
Chart 2
UNITED HEALTH GROUP
[b-GT-Cht2-0404]
Another giant in the sector, WellPoint (WLP), offers an additional short-
term chart with good potential. Last week, it soared 10.7% on strong volume
before reaching a short-term price ceiling (see Chart 3).
Chart 3
WELLPOINT
[b-GT-Cht3-0404]
This ceiling is a zone between 71.50 and 73.00, defined by key turning
points seen over the past year. If the stock can hold its ground during the
current market dip (it traded Wednesday at 71.80) and then move above the
zone, it would have a good chance to reach last year's highs in the 80 area
over the next few months.
Cigna (CI) offers a very similar short-term chart (see Chart 4). Last week
it broke through a price ceiling at 47.50 and ran to just shy of 50. Trading
at 48.60 Wednesday, it seems to be in a textbook corrective decline with
light volume. A fresh bout of strength now could send it on its way to last
year's peak near 53.
Chart 4
CIGNA
[b-GT-Cht4-0404]
Of course, when legal decisions are pending, technicals usually take a back
seat. But barring surprises along the way, the old saw of buying the rumor
and selling the fact may apply. Last week, we got the rumor. In June, the
Supreme Court's ruling may give bulls an excuse to cash in their winnings. |
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