Stock Market Signals Health Reform Flop

President Obama's push to pass health care reform will fall short -- that is, if the stock market is any indicator.

Thursday saw more than twice the normal trading volume in shares of the Dow Jones U.S. Health Care Providers Index (NYSE: IHF), a closely watched assortment of health insurance companies, including Aetna, CIGNA, Humana and UnitedHealth Group. The uptick, at least in theory, could be read as a sign that the market perceives reform as unlikely to pass, said Don Dion, founder of Dion Money Management in Williamstown, Mass.

Video of President Obama urging Congress to vote for health reform.
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"Major reform, particularly a public option, would really hurt the health insurance providers," Dion said. "When it looked like this bill was closer to passing, IHF shares got hammered. Back when Scott Brown got elected -- when it seemed like Obamacare was dead -- IHF shares rallied. "

Mixed Signals?

IHF, an exchange-traded fund, closed up nearly 2 percent Thursday, moving up to around $52 per share from around $51. Another popular health care ETF, the Health Care Select Sector SPDR (NYSE: XLV), also finished higher on the session. (An ETF is a collection of stocks, like a mutual fund, that can be bought or sold as a unit on a stock exchange.)

But traders looking to cash in on the epic political cliffhanger might want to move beyond conventional wisdom -- in other words, zig when the market appears to be zagging.

"That the IHF is rallying isn't necessarily a signal that the market thinks reform will fail," countered Michael Johnston, senior analyst at Chicago-based ETF Database. "I think the market has come to accept that the worst-case scenario, i.e. the public option, is not going to happen. The stock's movement just shows that the market no longer has an expectation that health care reform is going to hurt these insurance providers one way or another."

Down to the Wire

Even amid reports that the Democrats were giddy about Congressional Budget Office findings favorable to their cause, IHF shares, counter to conventional wisdom, traded higher for most of Thursday. Democratic leaders now have about 48 hours to marshal enough support from representatives to bring the final vote to the House floor, which, if it is going to happen, is expected to be on Sunday.

"Despite this rollercoaster, the reform bill is going to pass," said Judy Feder, a professor of public policy at Georgetown University and a senior fellow at the Center for American Progress. During the Clinton administration in the early 1990s, Feder served as a senior policy advisor to Health and Human Services Secretary Donna Shalala, playing a key role in Hillary Clinton's unsuccessful effort to reform health care.

"The Democrats are pulling out all the stops," Feder added. "I do believe it's going to happen."

So traders looking to cash in one way or another will need to move fast, possibly even later today as the final push winds down.

"If Obama does not have the votes, the IHF will pop," said Tim Bepler, portfolio manager at New York-based money manager Kinsale Capital.

But if the Democrats do have the votes?

"One possible play would be to immediately short the IHF to take advantage of the knee-jerk reaction," he said. (Selling a security short is essentially a bet that it will go down.)

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