Tuesday, November 19, 2013

RGA: Bullish on reinsurance

Update 1/;23/2014: By count, RGA has completed its wave 3 {+2} rise and has swung into wave 4 {+2} to the downside. I've closed my bull position and have taken RGA out of play until there's a new bull signal. The symbol is too illiquid for bear plays.

In its 65-day lifespan, the position gained 2.9% for an annualized result of 16.1%. Not awesome, but not awful, either.

Update 1/2/2014: RGA took a steep tumble today. However, although the position is showing a 3.3% profit, I've decided to hold on to it because of the Elliott wave count on the chart. 

My count shows RGA to be in wave 4 {-1} to the downside, a correction of the rise from $73.69 on Dec. 12, 2013. The count suggests that RGA will stay above $73.69 and after a correction lasting a few weeks, will resume its rise, setting new highs above the wave 3 {-1} peak of $77.55, as waves 5 and 5 {+1} to the upside continue

A drop below $73.69 would mean that my count is wrong and would prompt me to exit immediately.

Click on map to enlarge.
RGA 180 days 5-hour bars (left), 2 months 1-hour bars (right)

Update 11/19/2013: I opened a bull position on RGA, structuring it as long shares.

Reinsurance Group of America Inc. (RGA) has an ambiguous chart. It broke above its 20-day price channel on Monday, sending a bull signal, and confirmed it today.

Using Elliott wave analysis, I find a clear count at the larger magnitude that places RGA in the middle of three uptrends that will mark the present rise from $48.76 on Nov. 16, 2012. Also, it's clear that RGA is the the lower magnitude fifth, and final, uptrend, beginning Aug. 28 from $63.95.

RGA 10-years weekly bars (left), 1 year daily bars (right)

The ambiguity comes at a still lower level, when I try to calculate how far wave 5 has progressed. By one count, it is in the middle of three uptrends; by another, it is in the final push up.

The trend channel on the right chart helps resolve the question, I think. Under the ideal form, wave 5 would top near the upper boundary of the trend channel, which is about $14 above the present price.

Guarantees? There are none. But that's what a normal wave 5 would look like under these circumstances.

RGA has a record of success. The four bull signals since wave III began in November 2012 have produced three successes, on average yielding 8.7% over 48 days. The unsuccessful signal lost 1.6% over nine days. That's a hefty 7.1% win/lose yield spread.

This is the second bull signal of the wave 5 rise from August. The first yielded 3.6% over 31 days.

Reinsurance Group of America, as its name says, assumes risk from other insurance companies by insuring the life insurance they have written. Headquartered in Chesterfield, Missouri, the company operates globally and has $2.9 trillion in life insurance in force.

Analysts come down perfectly neutral on Reinsurance Group's prospects -- an enthusiasm index of zero.

The company reports return on equity of 6% with debt running at 385 of equity. It's not an especially large return, but when you consider the scale of Reinsurance Group's operations, I suspect the amount is quite adequate.

The company has been consistently profitable the last three years until it hit the second quarter of 2013, when it suffered a fairly large loss due to a one-time charge to account for increased claims in Australia. It returned to profitability in the most recent quarter. Of the last 12 quarters, seven have surprised to the upside and four to the downside.

Institutions own 90% of shares, which are selling at a steep discount. It takes 50 cents in shares to control a dollar in sales.

RGA on average trades 290,000 shares a day, sufficient to support a moderate selection of option strike prices spaced $5 apart. Open interest is low to non-existent with super-wide bid/ask spreads. Any position I open in RGA will be in the form of long shares.

Implied volatility stands at 20%, slightly below the six-month range. It has been zig-zagging higher from the 15% level of early November.

Options are pricing in confidence that 68.2% of trades will fall between $68.77 and $77.29 over the next month, for a potential gain or loss of 5.8%, and between $70.98 and $75.08 over the next week.

Options trading today is heavily skewed toward puts, which are running nearly five times their average five-day volume. Calls are at 35% above average volume.

Reinsurance Group of America next publishes earnings on Jan. 27. The stock goes ex-dividend in February for a quarterly payout yielding 1.64% annualized at today's prices.

Decision for my account: I like the chart, sort of, and I like the financials, sort of -- the best I can say for RGA is that there's nothing I loathe about it. 

But often that's enough. Despite my ambiguous attitude toward the trade, I plan to take it. I'll open a bull position in the last half hour before trading if RGA's upside momentum continues, and add it to the Watchlist if momentum falters.

I don't automatically disallow trades I'm unenthusiastic about. I rely on my exit rules to keep my trading funds from suffering too much harm.

And, on the plus side, the odds are quite good. I think it's a risk I can take.


My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

No comments:

Post a Comment