Biotech is red hot right now. XBI, the SPDR S&P Biotech ETF, put in a new all-time high just a few days ago. An upcoming seasonal trade in biotech suggests there are even more new highs to come.
This seasonal trade has a perfect 11-0 record over the past 11 years. Last year’s profit on this seasonal trade was 27.34%. In 2016, the same trade did even better, earning 44.19%.
I’ll explain the trade in a moment. But first, why are healthcare and biotech so strong?
Call it “the two T’s” – Technology and Taxes. There are some very exciting technologies being developed in the biotech space… and the drugmakers, aka “Big Pharma,” are using their tax cut windfalls to make aggressive acquisitions.
The technology is creating enthusiasm. The acquisitions are pushing prices up. “Healthcare deals are off to their strongest start in more than a decade,” says a recent headline in the Financial Times.
In the first few weeks of 2018 alone, almost $30 billion of healthcare acquisitions took place. And the premiums – the amount the acquirer pays over the publicly listed share price – have been huge.
In 2017, the average premium paid in healthcare-biotech type deals was 42%. In 2018 so far, the Financial Times reports, it is an incredible 81%.
The hunger makes sense.
Big pharma needs innovation to stay profitable. As old drugs and medications go off-patent, new ones have to take their place.
And the technology in biotech today is amazing. Consider Moderna for example, biotech’s biggest “unicorn.”
Moderna has raised more than $1.5 billion at a $7.5 billion valuation. The company’s goal is to completely transform drug development… by turning the human body into its own mini-drug factory!
Moderna creates an artificial version of molecular couriers, also known as messenger RNA or mRNA. These molecular couriers are inserted into the body with the goal of teaching the body itself to manufacture certain proteins.
If Moderna’s concept is successful, sick bodies will be able to cure their own diseases. The medicine that cures the disease would be organically manufactured on site – by the human body itself.
Amazing stuff, right?
Moderna is still a private company but plans to go public in the next few years, and it is just one of the many examples of “moonshot” technologies being developed in biotech right now.
Recent changes to the tax code have also produced huge cash windfalls for Big Pharma. Publicly traded drugmakers have seen their tax bills drop dramatically in some cases due to especially favorable treatment of royalties on intellectual property (like drug patents).
These tax code windfalls are in the multi-billions for some Big Pharma players, and in the hundreds of billions for the healthcare space overall…freeing up cash to make aggressive acquisitions.
And the CEOs of these big fish companies are especially hungry to make deals and snap up the smaller fish because, as we’ve explained, they need innovation to stay profitable – and it is often easier to buy innovation than successfully create it in-house.
I share all of this with you in part because I know that it is hard for most people to buy an investment when it’s making new all-time highs. I want you to know that this opportunity is backed up by strong fundamentals.
Our pending seasonal trade in biotech, as mentioned, has an outstanding track record of 11 winners and no losers over the past 11 years with an average gain of nearly 18%.
What is the trade? It’s a buy of the S&P Biotech ETF, XBI. XBI holds more than 100 biotech stocks. This ETF is composed so that the stocks have a similar weighting.
The giant biotech companies – like Amgen (AMGN), Biogen (BGEN), Celgene (CELG), and Gilead (GILD) – don’t overpower the smaller companies in the ETF.
This means that price gains of the smaller specialty biotech companies have a better opportunity to positively impact the ETF. It also means that XBI will positively benefit from the hot acquisition environment, as it’s the smaller specialty companies that are getting bought out at large premiums.
We first told you about this trade last year. The entry date on the trade is February 6th, and the exit date is September 18th. Again, as mentioned, the profit on last year’s trade was 27.34%.
| Symbol | Trade | Entry Date | Entry Price | Exit Date | Exit Price | % Profit |
|---|---|---|---|---|---|---|
| XBI | Long | 2/6/2007 | $15.20 | 9/18/2007 | $18.40 | 21.07% |
| XBI | Long | 2/6/2008 | $17.72 | 9/17/2008 | $19.18 | 8.27% |
| XBI | Long | 2/6/2009 | $18.21 | 9/21/2009 | $18.31 | 0.56% |
| XBI | Long | 2/8/2010 | $17.71 | 9/20/2010 | $19.02 | 7.38% |
| XBI | Long | 2/7/2011 | $20.33 | 9/19/2011 | $20.55 | 14.07% |
| XBI | Long | 2/6/2012 | $26.77 | 9/17/2012 | $30.53 | 14.07% |
| XBI | Long | 2/6/2013 | $31.38 | 9/18/2013 | $42.57 | 35.65% |
| XBI | Long | 2/6/2014 | $46.23 | 9/18/2014 | $52.53 | 13.64% |
| XBI | Long | 2/6/2015 | $64.44 | 9/18/2015 | $79.03 | 22.64% |
| XBI | Long | 2/8/2016 | $45.67 | 9/19/2016 | $65.85 | 44.19% |
| XBI | Long | 2/6/2017 | $65.72 | 9/19/2017 | $83.69 | 27.34% |
| Average: | 17.819% | |||||
XBI triggered a Stock State Indicator (SSI) Entry signal in June 2016. It touched the SSI Yellow Zone in November 2016 but has been solidly in the SSI Green Zone for the past 15 months as it continues to move to all-time highs.
The volume-at-price chart shows that XBI broke out of an area of resistance at the $90 level as it climbed to new highs late last year. This breakout was significant. XBI hit this level in 2015 before falling steeply in late 2015 into early 2016.
Our proprietary time-cycle forecast is also bullish on XBI. The cycles are predicting a move higher into late 2018.
XBI has a Volatility Quotient (VQ) of 26.6% which is in the upper end of medium risk. Its current SSI Stop is $71.18.
The recent 5% decline could turn out to be a good entry point if the longer-term uptrend continues. And given the incredible pace of healthcare deal-making we’ve already seen in 2018, the odds of a “twelve for twelve” for this seasonal trade seem strong.
