The search for the legendary buyable dip
11/29/18

●UNH has been a strong stock in a strong sector

●Multiple record highs in recent months


 

There’s been a lot of talk lately about how “buy the dip” is no longer working for the US stock market.

Not to put too fine a point on it, but…duh. During roaring bull markets you can buy dips, during screaming bear markets you can sell rallies (although bear markets are rarer, briefer, and trickier to navigate than their bull counterparts). It’s not easy to recognize in real-time when the market is switching from one mode to the other, though, which is when most people get hurt.

When the market is somewhere in between the two extremes, as it seems to be now, opportunities may emerge on both sides of the market.

First, buy-the-dip for the broad market will be back some day—just don’t plan on the proverbial bell sounding to let you know. Second, there are individual stocks that have likely kept the practice from going extinct. Take a look at the following chart of health plan provider UnitedHealth Group (UNH), which hit a new all-time high near $282 yesterday—the sixth time since February that it’s swung to a new record:

UnitedHealth Group (UNH), 3/19/18–11/28/18. UnitedHealth Group (UNH) price chart. Dips after highs

Source: OptionsHouse


Health care has consistently been one of the more robust sectors over the past several months (the strongest S&P 500 sector over the past six), and UNH has certainly done its part. Aside from benefiting from the rally that swept up most of the market yesterday (see Market Mover Update, below), UNH also reaffirmed its positive guidance for this year, and a strong outlook for 2019.1

UNH has also been cited as a stock that is more likely to weather the trade-war storms2—it’s domestic, service-oriented (e.g., no imports or tariffs to worry about), and in a strong (and defensive) sector and industry.

Even if those drivers continue, though, traders will remember that UNH has likely been good to those traders who have bought it on dips in recent months, not ones who chased it as it was making new highs after a nearly 4% up day. The chart shows a fairly consistent pattern in recent months of pullbacks forming soon after most of the new highs.

It may be a “trader’s market” these days, but it’s not a market for careless traders.

Market Mover Update: Yesterday US stocks had their best overall day since November 7, apparently cheered by Federal Reserve Chairman Jerome Powell’s comments that interest rates were approaching a “neutral” level. Among US indexes, the Nasdaq 100 (NDX) jumped the most, rallying more than 2.5% and increasing its gain this week to more than 5%—reflecting, at least for now, the bullish pattern discussed in “Analyzing a tech breakdown.”

An interesting sector note regarding Powell’s speech: Housing stocks, which had been getting creamed in early trading yesterday on the heels of a lousy New Home Sales number, reversed course after the Fed chairman spoke. Homebuilder LGI Homes (LGIH, chart below), which was down as much as -4%, jumped to more than 1.5% in the green after Powell’s comments, while D.R. Horton (DHI) flipped from -3% to +1%. A perceived end to rate hikes could translate into homebuilders, lenders, and buyers worrying less about rising mortgage rates.

LGI Homes (LGIH), 5-minute, 11/28/18. LGI Homes (LGIH) prie chart. Pre- and post-Powell.

Source: OptionsHouse


Today’s numbers (all times ET): Personal Income and Outlays (8:30 a.m.), Pending Home Sales Index (10 a.m.), EIA Natural Gas Report (10:30 a.m.), FOMC Minutes (2 p.m.)

Today’s earnings include: American Woodmark (AMWD), Dollar Tree (DLTR), HP (HPQ), Palo Alto Networks (PANW), VMware (VMW), Workday (WDAY).

 

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1 Zacks.com. UnitedHealth Gains on Strong 2019 Outlook, Acquisition News. 11/28/18

2 CNBC.com. Four trade-proof stocks to weather rising China-U.S. tensions. 11/27/18.