From the desk of Tom Bruni @BruniCharting
Wednesday’s Mystery Chart is one of my favorite right now, so thank you everyone for your feedback and participation.
I received a lot of answers, but most of you were skeptical of the breakout and wanted to see more before getting involved. A few others wanted to be long with a tight stop and few, if any, were sellers.
With that as our backdrop, let’s get into it.
The actual chart was the ratio of the Insurance subsector ($IAK) relative to the S&P 500, which is breaking out to 11-month highs as momentum gets overbought for the first time in nearly 2 years.
To me this looks like a textbook trend reversal, so while there may be some backing and filling over the near-term, Insurance stocks look set to outperform over the intermediate/long-term.
Click on chart to enlarge view.
The relative strength is also apparent on the absolute price chart of IAK. If we look at the weekly chart below, we can see a successful retest of its 2007 highs late last year with momentum staying out of oversold conditions. This is in contrast to other Financials subsectors that struggled with their 2007 highs and are just now beginning to accelerate to the upside.
Given our outlook for a mixed environment at the Index level of US Stocks, we want to be expressing this thesis through the sector’s strongest individual components.
One name that looks poised to head higher is Arch Capital Group. In the near-term it’s pulling back from all-time highs as momentum diverges, but if prices can consolidate above 33 and eventually break above 34.25, we can be long with a 3-6 month target near 40.