Health insurance carriers are holding intermediate support levels despite chaotic political swings that have generated massive opposition to Republican health care reform efforts. This resilient price action tells us investors and market players aren’t worried, at least yet, that industry profits will suffer when the smoke clears, and new legislation becomes the law of the land.
A number of major carriers have already pulled out of ACA coverage, lowering their exposure to legislative surprises, but that might not protect them because new laws are likely to impact the entire system from premium gathering to final payments. Also, taking insurance away from tens of millions of current policyholders could also have an adverse and chaotic effect because that entire premium base will be lost.
Dow component UnitedHealth Group, Inc. (UNH) broke out above the 2005 high at $64.61 in 2013 and entered a powerful trend advance that continued to post new highs into the first quarter of 2017. Rally momentum escalated after the November election, signaling optimism that new administration policies would underpin profitability. The company pulled out of ACA coverage in 2016.
It hit an all-time high at $172.14 on March 16th and turned lower, posting greater than average selling volume during Congressional negotiations that broke down near month’s end. The decline settled on the 50-day EMA about two weeks ago, with the stock holding like glue to that intermediate support level into April. The selloff had an adverse impact on institutional sponsorship, with On Balance Volume (OBV) falling to the lowest-low since January.
Aetna, Inc.(AET) topped out at $60 in December 2007, following a 7-year uptrend, and sold off to the mid-teens during the 2008 economic collapse. It returned to the prior high in 2013 and broke out, entering an uptrend that peaked at $134.40 in June 2015, ahead of an intermediate correction that found support in the low-90s in the first quarter of 2016. The subsequent recovery wave reached resistance after the election, but the stock failed to break out, instead of turning lower into February.
A bounce at the 200-day EMA gathered momentum into mid-March but reversed about 2-points under the 2016 high, dropping back to the 50-day EMA during the health care debate. On Balance Volume (OBV) has been dropping like a rock since 2016, signaling a bearish divergence that opposes a bullish cup and handle breakout pattern. This marks a major bull-bear standoff that could last into the second half of 2017.
Humana, Inc.’s (HUM) pattern looks similar to rival AET because the companies were locked into a merger agreement until the Federal government nixed the deal in January 2017. HUM topped out in the upper-80s in January 2008 and sold off into the upper-teens in March 2009. It took more than two years for the subsequent bounce to reach resistance at the prior high, ahead of a 2014 breakout that stalled near $220 in May 2015.
The stock carved a long rounded base into the second half of 2016 and took off in a strong rally that reached the prior highs in December. It pulled back into January 2017, testing the 200-day EMA and returned to resistance once again, completing a cup and handle breakout pattern. The stock is also sitting on the 50-day EMA after the reform debacle but has attracted much strong buying interest than its former suitor.
The Bottom Line
Health insurance carriers have pulled back to their 50-day EMAs and entered holding patterns after the administration, and House of Representative failed to deliver health reform legislation to the U.S. Senate. While UnitedHealth Group has carved the strongest rally in recent years, Humana now shows the greatest upside potential, after completing a cup and handle pattern backed by strong buying volume.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>