Insurance companies underperformed the broad markets for much of 2020 mainly due to the strong resistance offered by the 200-day moving average. While most traders have focused on sectors such as technology and health care, chart patterns discussed below suggest that the insurance segment could dominate the focus of traders during the first several weeks or months of 2021.
- Bullish chart patterns and nearby levels of support suggest that stocks in the insurance industry are set to make a strong move higher.
- Well-defined trendlines on charts across the insurance industry are creating well-defined risk/reward setups for those looking to position themselves in 2021.
SPDR S&P Insurance ETF (KIE)
Active traders who are interested in gaining exposure to the insurance sector may want to consider taking a closer look at niche exchange-traded products such as the SPDR S&P Insurance ETF (KIE). As the name suggests, the fund comprises holdings from across the insurance sector such as brokers, life and health insurance, property and casualty insurance, and reinsurance.
Looking at the chart below, you can see that a well-defined ascending triangle pattern has formed. The recent break beyond the resistance of the pattern suggests that the bulls are in control of the momentum. In addition, the recent crossover between the 50-day and 200-day moving averages suggests that a new long-term uptrend could just be getting underway. Short-term target prices will likely be placed near $40.50, which is equal to the entry price plus the height of the pattern.
Cincinnati Financial Corporation (CINF)
As one of the top holdings of the KIE ETF, one insurance company that could be of specific interest to traders over the weeks ahead is Cincinnati Financial Corporation (CINF). Looking at the chart below, you can see that the price recently surpassed the resistance of the 200-day moving average and looks well positioned to make a move higher.
Traders will most likely use this pattern when determining the placement of buy and stop orders over the weeks ahead. Buy orders will likely be placed near current levels, while stop-loss orders will most likely be placed below the 200-day moving average in case of a sudden shift in underlying fundamentals or market sentiment.
Insurance companies base their business models around assuming and diversifying risk. The essential insurance model involves pooling risk from individual payers and redistributing it across a larger portfolio. Most insurance companies generate revenue in two ways: charging premiums in exchange for insurance coverage, then reinvesting those premiums into other interest-generating assets.
Brighthouse Financial, Inc. (BHF)
Another top holding of the KIE ETF that could capture the attention of traders over the weeks ahead is Brighthouse Financial, Inc. (BHF) Looking at the chart below, you can see that a well-defined ascending triangle pattern has formed, which many traders will likely use to determine the placement of their orders over the weeks ahead.
More specifically, buy orders will most likely be placed near current levels, while stop-losses will likely be placed below the 200-day moving average or the lower trendline near $29.45. As confirmation of a move higher, traders may also want to note the recent crossover between the moving average convergence divergence (MACD) indicator and its signal line, which is a common buy signal used by those who follow technical analysis.
The Bottom Line
While most of the attention of active traders over the past several months has been spent on sectors such as health care and technology, insurance companies have underperformed. However, insurance could be the group that is best suited for a strong mover higher. Breaks beyond key levels of resistance near major levels of support are creating lucrative risk/reward setups for active traders and could make this group the one to watch for months to come.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.