The Struggling Sector Staring Down Irma Headwinds

Insurance stocks will be in focus as Hurricane Irma hits Florida and the Caribbean

by Patrick Martin

Published on Sep 6, 2017 at 3:45 PM
Updated on Jun 24, 2020 at 10:16 AM

Wall Street will be nervously eyeing insurance stocks in the next several weeks, as the damages from Hurricane Harvey and Hurricane Irma impact markets. Travelers stock has already felt the pain in the wake of Harvey, while Florida-based insurers got crushed yesterday in anticipation of Irma's expected landfall on Saturday -- with the U.S. National Hurricane Center saying the storm is "potentially catastrophic." With this in mind, the SPDR S&P Insurance ETF (KIE) could be headed for more trouble. Below, we'll take a closer look at the sector, and see how options traders are positioning themselves on insurance stocks Progressive Corp (NYSE:PGR) and Allstate Corp (NYSE:ALL).

KIE Braces for Worst Week Since April 2016

It's been a rough stretch for the insurance sector, per data from Schaeffer's Senior Quantitative Analyst Rocky White. Of the 21 insurance stocks we track, just 19% are trading above their 80-day moving average -- among the worst of all the sectors we follow. However, median short interest for the stocks is only 1.4%, suggesting the bearish bandwagon is far from crowded. Plus, more than half of analysts maintain a "buy" or better rating on the stocks, indicating the door is open for further downgrades, which could send the shares even lower.

For KIE specifically, the exchange-traded fund (ETF) has been in a sharp decline since hitting a record high of $92.40 on Aug. 8. The shares closed below their 200-day moving average for the first time since June 2016. To make matters worse, KIE is on track to post its worst week since April 2016.

Sector Analysis KIE

Put Traders Have Targeted Progressive, Allstate Stocks

Both PGR and ALL stocks have pulled back since hitting record highs in August. And while PGR stock is up 2.2% today to trade at $45.10, and ALL stock is up 1.8% to trade at $88.03 -- they each closed in oversold territory last night, suggesting a near-term bounce may have been in the cards. Specifically, Progressive's 14-day Relative Strength Index (RSI) settled Tuesday at 27, while Allstate's 14-day RSI hit 26. 

Against this backdrop, options traders have been quick to target puts on the insurance stocks, with put volume for PGR and ALL hitting annual highs yesterday. This is just more of the same for both stocks, however. 

Progressive stock, for starters, has a 10-day put/call volume ratio of 4.83 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- in the 92nd percentile of its annual range. This means puts have been bought to open at a near-annual-high clip in recent weeks.

ALL, meanwhile, has a Schaeffer's put/call open interest ratio (SOIR) of 2.80, which ranks in the highest percentile of its annual range. In other words, short-term speculators have rarely been as put-skewed toward the stock as they are now. Digging deeper, PGR's September 46 and 47 puts are home to peak open interest, while the September 85 put is Allstate's front-month open interest.

A Schaeffer's 39th Anniversary Exclusive!

8 Top Stock Picks for 2020

Access your FREE insider report before it's too late!