Health insurance carriers are acting well despite the COVID-19 pandemic, with components trading close to 2020 highs. It seems counter-intuitive, but these securities are in the "sweet spot" because they can now raise rates without congressional or statehouse interference and compensate for the additional costs of virus treatment. The benefit is especially potent with Medicare Advantage plans because The Centers for Medicare and Medicaid Services (CMS) have no choice but to sign off on rate increases.

The blue-chip insurance providers are also benefiting from a second, little-known characteristic of the pandemic. Americans are forgoing or delaying treatments for other ailments to avoid virus-ridden hospitals and waiting rooms, lowering routine payouts for cardiac care and a hundred other medical conditions. Of course, treatment delays will makes things worse in the future, with delayed procedures like a routine angioplasty potentially blooming into full-fledged open heart surgery.

The political environment is giving insurers another economic boost heading into the 2020 election. Democratic candidate Joe Biden does not favor a single-payer system, while costly government stimulus programs have emptied the coffers, making a Medicare/Medicaid expansion prohibitively expensive. And everyone knows President Trump's position on national health care, with the administration still trying to dismantle Obamacare.

Chart showing the share price performance of UnitedHealth Group Incorporated (UNH)
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Dow component UnitedHealth Group Incorporated (UNH) broke out above the 2005 high at $64.61 in 2013, entering a powerful uptrend that continued with few corrections into the December 2018 top at $286.53. Sellers took control into the first quarter of 2019, dropping the stock to an 18-month low after the CEO David Wichmann issued a stern warning about single-payer initiatives. Weak buying interest into July carved a lower high, setting up a successful test at support in October.

The stock completed a round trip into the 2018 high in December 2019 and broke out, but it made little progress into February. It then collapsed with world markets, dumping to a two-year low in the $180s in March. Impressive second quarter buying pressure completed a V-shaped pattern into the prior high in April, yielding a late-May breakout that failed just two weeks later, reinforcing resistance just above $300.

Price action has settled into a trading range with support near $275, which also marks the 200-day exponential moving average (EMA). It based at the 50-day EMA for more than two weeks and has turned higher on Thursday, posting a three-week high. The on-balance volume (OBV) has been grinding across the December 2018 peak during this period, in an advantageous position for a successful breakout and trend advance that could reach $400.

HUM
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Humana Inc. (HUM) bounced back to the 2008 high at $88.10 in 2011, ahead of a 2013 breakout that posted outsized returns into June 2015, when the stock topped out at $219.79. It completed a cup and handle breakout at that level in May 2017, entering a rising channel that contained price action into a December 2018 breakdown that found support at a two-year low in the $220s in April 2019. The stock returned to the high in December and broke out, stalling above $380 in February 2020.

The subsequent decline ended at a three-year low just above $200 in March, giving way to a bounce that unfolded at the same trajectory as the prior downturn. It completed a 100% retracement in April and broke out, posting an all-time high at $412.70 a few weeks later. The stock has just turned higher after a June test at new support and may soon confirm the breakout. Accumulation readings are cooperating with this bullish effort, lifting to all-time highs as well.

The Bottom Line

Shares of health carriers may complete breakouts in July despite the pandemic and enter a period of out-sized investor returns.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.