The Stock: Industrial Alliance Insurance and Financial
The Trend
Interest-rate-sensitive stocks are starting to add to the stock market script as 2010 draws to a close. The U.S. 10-year Treasury yield index is up 21 per cent this quarter - a shattering move for the bond market. The Stock Trends filters are now full of bearish trending U.S. bond funds. Government of Canada 10-year bond yields have crept up this month, too - rising to a high of 3.3 per cent last week. Reflecting the rising rates is the slipping performance of TSX-listed bond ETFs such as the iShares DEX Universe Bond Index fund. Suffering along with bond funds are interest-sensitive bank and utilities stocks, as well as real estate investment trusts and preferred shares.
However, one segment of the financial sector enjoys a more positive side of rising interest rates: the insurance industry. As rates rise, the value of financial assets supporting insurance liability exposure expand, improving the health of these firms. The low interest rates of recent times have been burdensome for the insurance sector, so the changing rate environment bodes well for these stocks. U.S. insurance sector exchange-traded funds SPDR KBW Insurance fund and iShares DJ Insurance fund are now testing short-term resistance after rallying off their 40-week moving averages this month. Aflac reflects the group's trend, while the stocks of insurers like Prudential Financial and MetLife are also showing positive trend alerts. Even the stock of bailout whipping boy American International Group in the midst of recapitalizing as the U.S. government starts to unwind its stake, is trading at new 52-week highs.
Canadian life insurance stocks are also hitting trend alerts. Although Manulife Financial has been hit by recent ratings downgrades, its stock has been in a Stock Trends Weak Bearish category since the beginning of November, suggesting that its long-term bearish trend is closing out. One of the current Stock Trends stock picks is Sun Life Financial profiled in this column a year ago when it looked to be advisable for investors to give the stock a cold shoulder. It may be time for investors who stepped away from the insurers last year to embrace the more positive trends developing in the group now.
The Trade
Trading in shares of Industrial Alliance Insurance and Financial Services elevated last Friday, lifting the stock to a high of $37.35 before slipping back to close near the resistance level the stock cleared after the company's credit rating was affirmed earlier in the week. Another current Stock Trends pick, the stock began its rally with many other insurance stocks a month ago, but the share price move above $36 now makes this a more appealing trend trade.
The Upside
Rising relative strength - a comparative performance measurement against the broader stock market - suggests that the stock will regain the valuations of two years ago when it traded above 13 times earnings. That would add another 16-per-cent gain on the current share price.
The Downside
If the stock fails to clear the May high of $37.40, it could show itself as range-bound in 2010. A retreat to the long-term 40-week moving average trend line around $33.50 would be disappointing.
Skot Kortje has been analyzing stock market trends for 15 years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to Stocktrends.ca
Skot Kortje