Dow component UnitedHealth Group Incorporated (UNH) fell nearly 17% on Wednesday and Thursday before closing out Friday's session with a 3.5% weekly loss. The volatile decline was attributed to cautious commentary by CEO David Wichmann, who sounded an alarm about universal health care proposals currently known as "Medicare-for-All," stating that they would "destabilize the health care system."
However, the media's instant acceptance of this self-serving comment by the CEO of a $216 billion insurance carrier makes no sense because the 2020 presidential election is still 18 months away, and as we learned from the Obama administration, everyone loves to talk about universal health care, but no one is willing to vote for radical change. This is especially true when D.C. politicians continue to fill their pockets with millions in donations from the health care industry.
Universal health care was first proposed in the United Sates in 1970 and has made little headway in the past 50 or so years. Health insurance coverage has expanded at a very high cost since that time, but the current system is so entrenched in the American mindset that it's unlikely to be torn down in the next decade. In addition, there's no data indicating that liberal Democrats will run away with the 2020 election, given the Republicans' impressive 2018 defense of their Senate seats.
More importantly, the stock market is more fixated on the next six months than the next three years, as evidenced by endless whipsaws since tariff threats started around January 2018. This perfect example suggests that the financial media is taking the CEO's comments at face value rather than identifying the real reasons for the decline. In support of this conclusion, few outlets have admitted to readers that the decline actually began on April 10, six days before UnitedHealth's blame game.
A less starry-eyed approach suggests that health care stocks are selling off because hedge funds are capitalizing on four months of sector weakness while placing bets that the Trump administration's court challenge of the Affordable Care Act (ACA) will succeed, triggering the chaos that the boss at a massive health insurer wants to blame on politicians. Senate Republicans have backed away from the issue, understanding the potential fallout in next year's election, but that might not stop the Fifth Circuit Court of Appeals from issuing a decision that ends Obamacare.
UNH Long-Term Chart (2006 – 2019)
A multi-year uptrend ended in the mid-$60s in 2006, giving way to a topping pattern, followed by a breakdown during the 2008 economic collapse. The stock posted a seven-year low during the October crash and turned higher, completing a round trip into the prior high in 2013. The subsequent breakout attracted intense buying interest, more than quadrupling UnitedHealth's share price into December 2018's all-time high at $288.
A sell-off into year end found support at a seven-month low, ahead of a recovery wave that posted a lower high in January 2019. Price action since that time has been extremely bearish, dumping the stock into a test of the February 2018 low last week. The monthly stochastics oscillator entered a sell cycle in November 2018 and has now reached within a few ticks of the oversold level, confirming the downtrend in place for the past four months.
UNH Short-Term Chart (2017 – 2019)
The price pattern since October 2017 has carved the outline of a potential head and shoulders pattern with a neckline at $209, telling observant market players to watch closely if the next bounce reaches the upper red line at $250. However, this pattern could resolve in many ways, so it's just a red flag for now rather than a sell signal. The on-balance volume (OBV) accumulation-distribution indicator confirms the high stakes, dropping into the low posted at the start of this potential top.
The Bottom Line
The UnitedHealth CEO is blaming Democrats for a downtrend that started months before the current drumbeat of Medicare-for-All, instead of admitting that the health care sector is extremely overbought and in need of an intermediate correction.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.