Turn to Insurers for Some Portfolio Insurance

 | Aug 29, 2016 | 5:29 PM EDT
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We've heard about the dearth of hurricanes over the last 10 years, with no major hurricanes (category 3 or higher with winds above 110 mph) making landfall since 2005. Sure enough, it has been a calm season so far this year, even as interest rates are starting to tick up gradually on fears that the market has gotten behind the curve on the Fed's normalization plans. This combination has been a boon to insurance stocks, the one part of the financial sector that broke out to new all-time highs last week, as reflected in the SPDR S&P Insurance ETF (KIE) . However, that move largely was overshadowed by the anticipation over the Fed's Jackson Hole summit.

Following Fed Chairwoman Janet Yellen's near-term hawkishness in trying to prepare the market for a possible September rate hike, we saw above-average relative strength in both life/health and property-casualty names as the KIE vaulted back to new all-time highs. While property and casualty stocks have outperformed life and health steadily over the last year, life and health stocks have made a formidable comeback, with names such as Principal Financial Group (PFG) , Aflac (AFL) and Torchmark (TMK) all returning greater than 5% year to date.

Meanwhile, KIE has been on a roll, up 2.4% for the month of August with two trading days left to go. While this achievement has lagged the broader financials space, there are signs that trend could change given KIE's move back to all-time-high territory. As the charts of KIE show, this move just exceeded the May 2016 high of $73.36, which had been repelled near both the November and August highs from 2015. Thus, this breakout has exceeded three prominent highs in the last year that had held as serious resistance (I say "prominent" given that each peak was followed by at least a 9% correction or more.) It's likely this move leads to further intermediate-term gains and acceleration for many of the stocks that have not yet experienced breakouts.

While some might look at this breakout in frustration thinking they missed it again (77% of active managers have underperformed the market year to date), as the saying goes, "Sometimes it's wise to chase after that fleeting horse out of the barn and climb aboard" versus holding out hopes that it returns. The S&P 500 Life and Health Insurance Index, for example, just broke out of a one-year downtrend, yet remains more than 12% off its all-time highs made last June. Property and casualty stocks, meanwhile, have continued their ascent in steady, non-parabolic fashion over the years.

What stocks are wise to "chase," or buy now, technically speaking, thinking they could see above-average appreciation? Ten names stand out:

  • Aflac, Cincinnati Financial (CINF) , Marsh & McLennan (MMC) , Arthur J. Gallagher (AJG) , Aon (AON) and Assurant (AIZ) all have shown above-average performance year to date but have consolidated sideways in the last one to two months. These are starting to turn higher to challenge recent highs and look like attractive technical risk/reward candidates.
  • Arch Capital Group (ACGL) , First American Financial (FAF) , ProAssurance (PRA) and Torchmark have been stronger than normal in the last month, but technically still appear quite attractive based on my proprietary methods of viewing their technical structure.

Here are some charts to put this move into perspective: 

KIE -- Its breakout has exceeded three prior highs, starting with the peak last August. While overbought in the near term, this is a technically bullish intermediate-term move.

KIE has largely trended in line with interest rates, and given the recent uptick, has also responded quite positively.

S&P 500 Life and Health Index -- Attractive breakout of its one-year downtrend, but potentially even more interesting from a risk/reward perspective, as it lies 12% below former highs.

Property and casualty stocks, as reflected in the S&P 500 Property and Casualty Index, have remained quite resilient over the years, outperforming life and health steadily.

Ratio charts of life/health to the property-casualty stocks show the underperformance that is slowly giving way to a counter-trend bounce, technically speaking. So life and health names very well could outperform in the near term. 

Financials, as reflected in the Financial Select Sector SPDR ETF (XLF) , have been trending up steadily versus the S&P 500. Breakouts of this downtrend would portend a greater period of relative strength for this group, which as the second-greatest composition of the S&P 500, would be meaningful, likely in helping to provide a tailwind for stocks at a time when most are viewing the S&P's rally into September with great trepidation.

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