Allstate (NYSE:ALL) is the second-largest home insurer in Louisiana, the US state that was just bludgeoned by Hurricane Ida, the 150mph behemoth of a storm that earlier this week left more than 1 million people without power in the region, and at time of publication was reported to have killed five people. Described as "one of the most powerful hurricanes ever to hit the U.S. Gulf Coast," Louisiana's governor, John Bel Edwards described the damage wrought by the storm as "catastrrophic."
Ironically, Ida struck the state exactly 16 years after Hurricane Katrina, which decimated New Orleans, Louisiana's largest city, among other municipal casualties and killed 1,800 people.
Though State Farm is the largest home insurer in the area, it's privately held. So Allstate is the single largest publicly-traded home insurer awaiting the many expected claims resulting from the devastation, and therefore the company in the sector that will likely be most affected by Ida. Allstate has had teams in place in neighboring states since Monday, ready to facilitate the many anticipated claims.
Early estimates put the cost to insurers at between $15 and $20 billion, with some media sources going as high as $30 billion. However, insurers, and the general public, will likely learn more in the coming days. How might the huge level of claims affect the stock?
Within the first three months after Hurricane Katrina, Allstate shares initially fell, before moving sideways for another eight months. After that the stock rallied for five out of the following 6 months, making new highs.
Let’s compare that to the current price action for ALL.
The stock opened the week with a steep decline, falling below its uptrend line since the monthly low. The price was already peaking, as it neared the May-June highs, suggesting weakness.
If the price continues on its track, falling below the June 18, $123 level, it will have completed a double-bottom. Notice how the 200 DMA is rushing to provide support to the neckline, revealing its significance in the supply / demand balance.
The ROC, a more sensitive momentum-based indicator than the more commonly used RSI, has already fallen below its uptrend line, and the MACD’s short MA is about to cross below its long one, triggering a sell signal. Note how the MACD also hit a peak far below its activity during the May-June price apexes.
Trading Strategies
Conservative traders should wait for the price to decisively pierce the neckline and 200 DMA, then wait for a return move that confirms the newfound resistance.
Moderate traders would short if the price retests the recent highs, or after it falls below the neckline.
Aggressive traders could short now, provided they understand and accept the heightened risk that corresponds with moving before the rest of the market.
Trade Sample
- Entry: $135
- Stop-Loss: $140
- Risk: $5
- Target: $105
- Reward: $30
- Risk:Reward Ratio: 1:6