With the recent decline in interest rates thanks to a strong bond market, dividend stocks are back in favor. Sectors that do well when bonds rally are setting up for a nice move higher.
HCP (HCP) is a real estate investment trust (REIT) that owns and manages health care properties. I am not big on trying to figure out what stocks will do well under the Affordable Care Act (Obamacare), but rather look for stocks with charts that signal they are ready to go higher. With a generous 4.9% dividend yield and improving technical indicators, HCP is indeed set up for price gains.
As a group, stocks offering big dividends peaked in May when the bond market began to fall. At the time, the Fed first hinted that it was considering the tapering of its bond buying program. Utilities, REITs, housing and many consumer staples stocks headed lower as traders thought interest rates would rise.
Now that tapering seems to be off the table for a few months, dividend-paying stocks have regained favor. HCP in particular bottomed in early October and has been moving higher ever since.
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On Oct. 3, there was a management shake-up, and the stock plunged 4.7% on exceptionally heavy volume. It continued lower the next day on an analyst downgrade, but the two-day event was an emotional event called a "selling climax."
Bullish investors basically threw in the towel and sold. Sentiment was excessively bearish and, theoretically, everyone who was going to sell did so. Bearishness was washed out, and in the absence of selling pressure, it didn't take much demand to get prices shooting higher from there. It was contrarianism at its finest.
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There are a few other technicals I like here. The first is a bullish divergence between price action and momentum indicators. The relative strength index (RSI) set a higher low in October than it did in August, while price made a lower low. This suggests waning downside momentum, and most of the time, price corrects to follow RSI. So far, so good.
The stock is also back above its 50-day moving average. It's true that it did the same in September, but then fell back rather quickly. This month, however, it already has 10 closes above that average under its belt, suggesting that this time the upside breakout will hold.
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If HCP can breakout from this weeklong pause, then it would have little in its way until reaching resistance from its July high at $47.45. This is also close to where its 200-day average is now and a 50% retracement of the May-October decline.
Recommended Trade Setup:
-- Buy HCP at the market price
-- Set stop-loss at $41
-- Set initial price target at $47.45 for a potential 12% gain in five weeks