How Non-Beach Bums Should Play the Obamacare Decision

Stocks rose for the second consecutive day following a pending homes sales increase in May. Major homebuilder Lennar (NYSE:LEN) reported strong earnings and projected a steady recovery in the housing market. And U.S. durable goods orders posted their first improvement in three months in May.

Stocks were strong despite uncertain results from the summit of European leaders to be held late this week. And there was little impact on stocks from the guessing game associated with the Supreme Court’s decision expected today on the health care bill.

At Wednesday’s close, the Dow Jones Industrial Average rose 92 points to 12,627, the S&P 500 gained 12 points at 1,332, and the Nasdaq was up 21 points at 2,875. The NYSE traded 683 million shares and the Nasdaq crossed 417 million. Advancers led decliners on the Big Board by 3.7-to-1 and by 2.5-to-1 on the Nasdaq.

SPX Chart
Click to EnlargeTrade of the Day Chart Key

The S&P 500, like the other indices, is range-bound with trading confined to a narrow band with support at the 200-day moving average at 1,298 and resistance at the 1,358 line. In between there is resistance at 1,336 and support at 1,315. The internal indicators, including the stochastic, have given a sell signal but are in the middle of their range and not much help in determining the future trend. The same goes for our sentiment indicators.

Though the market gained Wednesday, volume was very light indicating that there are just too many uncertainties for most investors to make a decision, and so they are playing it cool and heading for the beach. But the Supreme Court’s decision on Obamacare could change many things.

John Ransom of Raymond James summarizes the possible outcome of the Court’s deliberation:

1. He thinks that the most likely outcome would be a split decision, which would shoot down the mandate leaving the remainder of the law intact. This should cause a near-term rally for low-multiple stocks like HCA Holdings (NYSE:HCA). But it could be a short-lived rally because of the 2013 concerns (fiscal cliff, debt ceiling, 2012 election results, taxes, etc.).

2. In the unlikely event that the entire law is struck down, he expects a negative impact on managed-care stocks. The Medicaid managed-care names would see the most downside. But he would expect a modest rally in the medical device and pharmaceutical stocks.

3. Finally, if the entire law is upheld, then the providers should surge since their current evaluations don’t reflect the potential of 35 million new customers. Hospitals, drug distributors, etc., would benefit.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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