The combination of the global credit crunch and the American International Group(NYSE: AIG) debacle placed the insurance sector on many "do not touch" lists. However, given the market's rebound from its March lows, now may be a good time to start looking for opportunities within the insurance sector. Technically speaking, this former laggard has been on fire since the March bottom. Specifically, the S&P Insurance Index (IUX) has rocketed more than 125% since setting a low of $75.08 on March 6, easily outpacing the S&P 500 Index's (SPX) gain of about 52% during the same period.
However, investors have yet to fully jump on the sector's bandwagon, as the KBW Insurance SPDR (NYSE: KIE) exchange-traded fund's Schaeffer's put/call open interest ratio (SOIR) of 1.68 ranks in the upper half of its annual range. This reading indicates that there are still some bearish investors who could capitulate to the group's strong technical performance, thus providing additional buying pressure for the sector.
One particularly noteworthy member of the insurance sector is Radian Group Inc. (NYSE: RDN). For the record, RDN provides private mortgage insurance (PMI) coverage to protect lenders from defaults by borrowers who put down a deposit of less than 20% when buying a home, according to Hoover's. The company also offers primary insurance and pool insurance, and insures and reinsures municipal bonds through its financial guaranty business.
The stock has soared more than 186% in 2009, gaining an impressive 1,073% since early March. During this intense rally, RDN has blown past several levels of potential resistance, including its recent breach of the round-number 10 level. RDN should now be able to utilize this region as a springboard for additional gains going forward. What's more, the stock's 10-day and 20-day moving averages have provided key support since mid-July, and are currently rising into the 10 region.
On the sentiment front, investors are still betting against the equity. In the options pits, RDN's Schaeffer's put/call open interest ratio (SOIR) of 0.66 ranks above 91% of all those taken during the past year. This reading indicates that options traders have rarely been more bearish toward the shares during the prior 52 weeks.
What's more, peak put open interest for September resides at the deep out-of-the-money 7.50 strike, totaling some 5,400 contracts. Peak call open interest for September, meanwhile, totals a mere 1,600 contracts at the deep-in-the-money 7.50 strike. This heavy attention to out-of-the-money puts and in-the-money calls means that investors are not expecting an extended rally from RDN shares.
However, it seems that sentiment could be shifting in the options pits. According to data from the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE), calls bought to open have nearly quadrupled puts purchased during the prior two weeks. Specifically, RDN's 10-day ISE/CBOE call/put volume ratio arrives at 3.80, indicating a rising preference for call buying.
Wall Street analysts have yet to take a stand on the insurance company. According to Zacks.com, all three brokerage firms following RDN rate the shares a "hold." Should the stock's recent technical prowess draw more analysts into upgrading the stock or initiating coverage on RDN, we could see an increase in buying pressure on the equity, thus sending the stock sharply higher.
Disclosure: Joseph Hargett has no financial interest in any of the equities or products mentioned in this column.
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