Mark HulbertHow not to react to Supreme Court's ruling
6/26/12 12:01 AM ET (MarketWatch)
CHAPEL HILL, N.C. (MarketWatch) -- Think you know how health insurers' stocks will react to the Supreme Court's decision on Obamacare?
You may want to think again. My analysis of the data suggests that any sizeable stock price reaction to any ruling will be short lived.
I concede that this isn't how most commentators are handicapping the situation.
They tell us to focus on what happened during the week in late March in which the Supreme Court heard oral arguments on the health-care law. That's when observers concluded that it had become more likely that the individual mandate would be struck down, and the five biggest publicly traded health insurers for that week rose an average of 9%.
But, as any statistician will remind you, that is just one data point. And, as such, any conclusion derived from it has no significance.
To see if more significance could be derived from the historical data, I turned to inTrade, which for 18 months now has maintained an electronic market for the trading of a contract based on the likelihood of the individual mandate being overturned by the Supreme Court.
If in fact such a ruling would have a big and lasting impact on the health insurers, then I should have found a marked correlation between their performance and the Intrade contract.
I plugged the 18 months of Intrade data into my PC's statistical software, along with the returns of the iShares Dow Jones U.S. Health Care Providers Index ETF (IHF) . That index, of course, is dominated by health-insurance companies such as
No matter how I sliced and diced the data, I found no statistically significant relationship between the two data series.
Consider the ETF's performance since the end of March -- in other words, since the Supreme Court heard oral arguments on Obamacare. Based on the pricing of the inTrade contract, investors over this period have become markedly more confident that the individual mandate will be ruled unconstitutional -- the probability of this outcome has risen from 62% to 76% currently.
Extrapolating from the correlation that existed in the last week of March, the iShares ETF should have risen in line with this increased probability.
And yet, over that time, it has fallen 7% -- even underperforming the return of the Dow Jones Industrial Average (DJIA) over the same period, and in the process erasing the gain achieved during the week of oral arguments at the Supreme Court.
This casts serious doubt on the notion that the health insurers will react in any given way by the Supreme Court's ruling.
The investment implication: The best way of playing any big reaction to the court's ruling may be as a contrarian. That is, consider buying those health-care stocks that fall by the greatest amount in the wake of the ruling, and selling those that react most favorably.
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