The Fed surprised the market last week with its decision to not taper its bond-buying program.
The market consensus was that the Central Bank would taper its monthly purchase of mortgage-backed securities and treasuries by $10-$15 billion, starting the process of removing the country’s economic training wheels as the data improves.
The decision caused a short-term windfall rally for stocks across the board, but more importantly it created an intermediate-term bullish situation for at least one sector. The steady climb in interest rates caused a headwind for insurance companies as investors became concerned about portfolio returns in a rising rate environment. These fears should be temporarily pushed aside as the yield on ten-year treasuries is now on the decline, potentially breaking into a new trend lower.
In addition to the favorable interest rate environment being extended, property and casualty companies appear to be in place for an addition tailwind. Recent reports have shown that the number of tornadoes and hurricanes have been on the decline for the year. The drop in these events could serve to help many insurance companies’ bottom lines over the short run.
Technically, the SPDR Insurance ETF (KIE) has remained in an intermediate-term bull market as the shares trade above their respective 20- and 50-day trend lines, both of which are on the rise. While the current market is flashing some signs of overall weakness for the S&P 500, the KIE is likely to gain some technical traction from these support levels, indicating a potential technical buying opportunity if shares move to the $55.75 level.
There are a few ways to play a potential move among the insurance sector. The obvious first option is to simply buy KIE shares. The ETF has returned almost 30% year-to-date, but looks ready to rise further. As mentioned, it looks as though chart support starts at $55.75, with another level of support at $54.50. On the upside, we’re targeting a move to the $62 level, about 9% higher than current prices.
For those that want to venture out into stocks within the sector, our technical scoring model ranks Travelers (TRV) as a buy. After taking the last four months to consolidate between the $80 and $90 range, TRV shares are threatening to make a break above that range. Sentiment towards TRV is relatively pessimistic, as 54% of the analysts covering the stock have it ranked a “hold”, meaning that a break above the trading range could spur some upgrade activity.
Finally, the company has bested earnings estimate each of the last four quarters, helping the bullish argument before the earnings announcement on October 14. The combination of positive technicals and pessimistic sentiment suggests that a positive earnings result will propel TRV shares higher.
As of this writing, Chris Johnson did not hold a position in any of the aforementioned securities.