Tuesday, December 17, 2013

The next obvious short play

Two extraordinary things have happened in the field of health care this decade.  The first is that Congress passed, and the Supreme Court allowed, a law that will effectively kill private health insurance companies by squeezing them financially from multiple angles.  Just last week the Secretary of the Department of Health and Human Services, Kathleen Sebelius, piled on by "requesting" that insurance companies provide coverage for customers who haven't yet started paying their premiums.

You don't need to be a mathematician to figure out that an already boxed-in insurance company can't afford to cover people for free.

The second extraordinary phenomenon has been the performance of health care provider stocks since the passage of the "Affordable" Care Act.  Between August 2012 and November 2013 alone, the health care provider sector has risen 50% compared to the 30% gain for the broad S&P 500 index.  Either somebody out there thinks health insurance companies are going to make more profit by making insurance more affordable, or there's some kind of artificial inflation being applied to these stocks.

Whatever the reason for the sector's recent performance, it's going to come to an abrupt halt when health insurance companies start closing their doors or filing for bankruptcy.  Proshares offers an ETF (RXD) that goes up in price when the health care sector goes down - I'll be looking to use this ETF when insurers inevitably start feeling the pain.

Friday, December 13, 2013

Indicators still neutral, rally continues

Short-term and seasonal factors are not favorable for the stock market, but long-term indicators still allow for a continuation of the rally that started in the spring of 2009.

The market bot "internal price forces" have fallen to 4.1 out of 10.  This is still comfortably neutral, and the market has rallied through lower readings in 2010 and 2011, so there's no cause for alarm at this point.

Sentiment indicators are at their most optimistic levels in more than two years, which is bearish in the short term.  A decent correction of 5% or more is likely, presumably followed by a resumption of the long-term rally.

The curious four-year stock market cycle is nearing its expected peak in May 2014, at which point returns historically turn negative leading up to the mid-term election in November.