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The Makings of a Bullish Storm Are in Place, and S&P 500 Is Likely to Benefit


Plus, who says Obamacare hasn't created opportunities?

Each of us wages a private battle each day between the grand fantasies we have for ourselves and what actually happens.
--Cathy Guisewite

After six days of a government shutdown, any form of resolution appears to be far from reach. In a colorful statement, House Speaker John Boehner basically said that he deplored the political deadlock and that it was anything but a game. However, as the non-game of chicken wears on with no resolution, markets remain in limbo.

In my article As Government Shutdown Looms, S&P 100 Trend Indicates Elusive Market Risk on September 30, I mentioned the rangebound Dow Jones Industrial Average (INDEXDJX:.DJI) and how it was the only one of the "four sister indices" holding back the pack. As it turns out, most of its range since then has been flattened, ~4.1%, and it currently resides near the bottom of the channel. From a risk-reward standpoint, the risk is small, but what's the reward?

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On the DJIA, the reward is most likely, at least in the short term, the height of the channel at ~5.5%. Seeing as the four sisters have a tendency to move in tandem, other indices may provide a better reward. At this juncture, the indice providing the best risk-reward metrics and technical strength is the S&P 500 (INDEXSP:.INX). Though the Nasdaq-100 (INDEXNASDAQ:NDX) and Russell 2000 (INDEXRUSSELL:RUT) have been strong, they remain extended and the potential for a 4-8% pullback is high. The SPX is not stuck in a channel like the DJIA, and it appears to have been forming a support level near 1,680 on the long-term upward-sloping trend since November.

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Assuming a resolution to the budget is made soon and markets find reason to rejoice, the makings of a bullish storm are in place, and the SPX would likely benefit. The greatest challenge -- and question -- is, when? If it takes another week and a half, another roadblock, the debt ceiling will be front and center. The United States defaulting would have even graver consequences than a partial shutdown. Considering this has never happened in our nation's history, the reaction in the market will most likely be anything but calm. This would most likely cause technical concerns due to the fact the SPX would probably break the latest intermediate-term bullish trend it's been traveling since November of last year. Thus, we sit and wait on the four major indices. But there are still opportunities.

Profiting From the Affordable Care Act

Who said the Affordable Care Act (also called Obamacare) hasn't created opportunities? I won't get into a political discussion over whether the act itself is right, wrong, or something else, but I will discuss an industry group that continues to profit from this sweeping health care reform: The iShares US Health Providers ETF (NYSEARCA:IHF) has seen quite the accumulation since January, ~29%. The ETF is made up primarily of health care providers and medical facilities. Looking under the hood, however, you'll notice the biggest drivers behind IHF are hospital companies.

With more people than ever before gaining access to medical care, this only means more volume and business for hospitals. Prior to the Act, hospitals' revenues were hurt due to the treatment of numerous uninsured patients with little to no means of paying their bills. Under Obamacare, these people now become paying customers. After Thursday's strong showing of interest in the new government insurance plans, investors found a resurgence of enthusiasm for the industry.

Technically speaking, IHF has been consolidating for three months. Even as the market pulled in from the early August highs, the ETF lost very little ground. With the aforementioned surge of interest in the government insurance plans, money is flowing into the ETF, potentially giving it the fuel it needs to break out of the consolidation range and move higher.

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As we sit at the precipice of a budget and debt ceiling resolution, markets are walking in lockstep with the uncertainty. However, with investor complacency continuing to grow by the day, a failure to come up with a solution could soon test markets' patience. After all, the one thing markets hate above all else is uncertainty. Furthermore, it's prudent to be ready for both scenarios -- that is, unless you have a crystal ball.

I hope this helps and finds you well.

Editor's Note: Read more at Tesseract Asset Management.

Twitter: @TAM_News
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TAM Portfolios has a position in IHI and XLV.

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