MKL - Markel: Building Strength In A Reinforcing Industry (Technical Analysis)

Summary

• MKL has been sold off from its ATH but has recently bottomed and formed a new uptrend on increasing relative strength.
• The stock is facing its major resistance and a possible breakout from it could lead to significant upside potential, while investors can limit their downside risk.
• In this technical analysis article, I show important price levels and metrics that could be considered by investors to gain an overview of the stock’s likely price action.
• The financial sector is likely to profit from a sector rotation as banks and insurance companies traditionally profit from rising interest rates.

Investment thesis

Markel Corporation ( MKL ) has been massively sold off from its ATH reached earlier this year, but has seemingly bottomed and retraced over technically important price levels, while now facing major resistance. The sector is giving some positive signs recently and the relevant industry is building significant relative strength. In this article, I focus on the technical aspects that could hint at an actionable trading setup for more short-term traders but also for long-term-oriented investors who value setting up specific entry points while limiting the possible downside, by considering appropriate stop-loss levels and actively managing the risk-exposure.

A quick look at the big picture

The financial sector in the US has been more defensive than other sectors, despite losing about 19% in the past twelve months, it could recently report some signs of stabilization while building some relative strength. The sector is recently led by the reinsurance industry, followed by property and casualty insurers, and diversified banking institutions, while other industries such as mortgage providers, financial data services and stock exchanges, or regional banks, are still struggling to recover.

Considering more specific industry groups, the SPDR S&P Insurance ETF ( KIE ) which marked its All-Time-High ((ATH)) on April 21, 2022, has been moving sideways after coming out of the pandemic low, reporting significant relative weakness during 2021 when compared to the broader Financial Select Sector Index, while more recently the industry group has demonstrated its resilience and reported meaningful relative strength, rebounding on its EMA200 on a weekly scale, and even increasing its strength on higher volume, by confirming its price over its medium-term EMA50.

By analyzing the historical stock performance, we notice that MKL had a quite mixed performance when compared to most of its main references, reporting some sporadic periods of relative strength, but mostly underperforming the S&P 500 (SP500), the broader iShares Russell 2000 ETF ( IWM ), and the industry-specific SPDR S&P Insurance ETF, resulting in a performance of 12.58% over the past 5 years. The stock could perform significantly better than its peer CNA Financial Corporation ( CNA ), while Cincinnati Financial Corporation ( CINF ) could report massive periods of relative strength, and despite consolidating more recently, the stock has been an outperformer over the analyzed time.

Where are we now?

MKL also reached its ATH on April 21, 2022, and has since performed rather poorly by entering its medium-term downtrend at the beginning of June on a weekly scale, and significantly dropping under its EMA50 by August. The stock bottomed on September 26, where it formed a short-term uptrend, and is now heading toward its medium-term moving average, after having confirmed the breakout of its long-term downtrend.

The stock is reporting consistently relative strength, when compared to the broader financial sector, and is seemingly in front of a trend reversal as shown by its MACD, which could additionally boost its positive momentum. It's important to note how MKL perfectly moves in its trend channel I determined with Andrews' Pitchfork since the pandemic low, by mostly hovering in the central trendline, as this can give a better idea of the likelihood of its extensions.

What is coming next?

On a daily time frame, it's interesting to observe how the stock is now building up relative strength when compared to its industry, which I track with the SPDR S&P Insurance ETF, KIE, while the momentum is increasingly positive and resilient. The stock retraced about 38% of its decline and is now heading toward its EMA200, a price level that will be determinant for the foreseeable future. A rejection from the EMA200 could project the stock back toward its EMA50, which is now hovering around $1,177, or even lower, toward the lows seen during September. An outbreak from its EMA200 would allow the stock to accelerate in its uptrend and probably head toward the top of the central trendline.

I expect the stock to further attempt to overcome its EMA200 in the short term, while a breakout would need a significant increase in its daily volume and the breakout would have to be confirmed, with the stock ideally ending over its EMA50 on a weekly scale. In this case, I would expect the first target at $1,275, and further toward the top of the central trend channel, while I would set my stop-loss slightly under the EMA200, as the stock could re-test that level to confirm the support.

As an alternative scenario, if the stock would be rejected at its EMA200, I would not tolerate any drop under the EMA50 on a daily chart, as this level is now likely the strongest support for the stock, and a drop under it could lead to an even poorer performance over the coming weeks. The stock likely needs some space as the volatility is seemingly still high, which I determine in a price span of approximately 8%, between $1,177 and $1,275.

Long-term-oriented investors who see the recent price levels as an opportunity could consider sizing their long positions accordingly, by considering a first position at the actual levels and by gradually increasing their exposure if the stock manages to overcome its EMA200. I would not consider any major position until the stock has confirmed a significant breakout over its long-term moving average.

The bottom line

Technical analysis is not an absolute instrument, but a way to increase investors' success probabilities and a tool allowing them to be oriented in whatever security. One would not drive towards an unknown destination without consulting a map or using a GPS. I believe the same should be true when making investment decisions. I consider techniques based on the Elliott Wave Theory, as well as likely outcomes based on Fibonacci's principles, by confirming the likelihood of an outcome contingent on time-based probabilities. The purpose of my technical analysis is to confirm or reject an entry point in the stock, by observing its sector and industry, and most of all its price action. I then analyze the situation of that stock and calculate likely outcomes based on the mentioned theories.

MKL is building strength after the stock has been sold off from its ATH. The financial sector is likely subject to a positive sector rotation as banks and insurance companies traditionally profit from rising interest rates. Although, the pace and magnitude rates have been increasing this year are historically steep and quite exceptional, and have been offsetting some of the returns, particularly when considering investments in bonds as those securities have seen the value of their principal dropping significantly. More risk-tolerant investors could take advantage of these price levels as the stock is confirming its uptrend and could likely overcome its EMA200 if the volume would see a significant increase and the stock would build up momentum. The downside is relatively limited by the mentioned stop-loss levels and the trend channel, long-term investors could progressively build up their long positions and profit from the recent drop.

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