Discounting Bad News
The biggest U.S. health insurer is
showing signs of having put in a bottom. As a momentum trader, though, I’d make
Aetna jump quite a few hoops before considering it for the long trade.
Aetna
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PowerRating) reported Friday that
operating net fell to 94 cents a share from $1.03 a year ago. The results
topped reduced analyst estimates averaging 88 cents, according to First
Call/Thomson Financial. The stock rose 1 3/16 to 59 1/2.
Aetna said that its second-quarter
commercial HMO medical loss ratio climbed nearly three percentage points to 85.9%.
The ratio is an industry measure of medical costs as a percentage of premiums.
Earlier this week, rivals CIGNA
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PowerRating) and UnitedHealth Group
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reported slight declines in their medical loss ratios.
On July 17, Aetna shares began falling
on heavy volume, a day ahead of the company’s warning that operating profits
would fall well below Wall Street expectations because of increased medical
costs.
On July 18, the stock gapped down
below its 50-day moving average on huge volume. Then the buyers came in en
masse, lifting the stock off its lows July 18, 19 and 20 to close in the upper
half of each session’s trading range (see black arrows
in chart). That’s a clear sign that institutions concluded the stock had
discounted the bad news and were using selling as an opportunity to add to
positions.
This is not a buy signal for the
momentum trader. However, you can put the stock on your long-range radar. The
issue now is whether Aetna can build a base and recover from here. The stock
needs to clear its mid level, which I’d put at about 63 7/8 and its 50-day
moving average. We also need to see Aetna return the fundamentals to positive
earnings growth.