Friday, June 27, 2008

Channeling the Insurance Industry

While surfing the market, I stumbled upon a life insurer called Presidential Life (PLFE) and remarked at what a great channeling stock it's been for about the last year. (See chart below.) Harking back to my Chocolate Channeling Bar recipe that I posted in my 2/8/08 blog, I decided to see if there were other stocks in the insurance group that might be exhibiting channeling behavior and by cracky you know what? I found some more.

You'll remember that the definition of a channeling stock is one that repeatedly trades between a support and resistance level. A channel is typically horizontal, but it can have an upwards or downwards bias to it, too.* The idea is to buy the stock when it bounces off the lower level, sell it when it hits the upper level, and then short it on its way back down.** One caveat is that sometimes the price never quite reaches one of the levels. This is where you need to be alert and have stop losses in place. Other than that, this strategy is actually quite a fun one and can be very profitable, too.

One good thing about a lot of channeling stocks is that they tend to be in cyclical groups. Sure, the companies are less exciting but the good news is that they tend to pay dividends. This gives you extra bang for your buck when you're on the long side (provided you purchase the stock before the ex-dividend date). Without further ado, here's a list of my candidates from the insurance group along with dividend yield and percent upside return. (The upside return was calculated by taking the range value (top of range - bottom of range) and dividing it by the bottom range value. Note that the corresponding downside return value will be less.)

If you look at the charts of the above stocks, you'll see that most of them are nearing the bottom of their channels. If you're interested in playing any of these, wait until they bottom out and start to turn around. And don't forget to set your stop losses!

*American National Insurance (ANAT) is trading in a well-defined downwards channel and it sports a dividend yield of over 3% and an upside return ranging from 13-18%.

**See Recipe #3 for more details on how to trade this strategy.

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