Biotech Goes 11 and 0

This past April we told you about a simple trade in biotech that made good money every year for the past 10 years. The trade is now over, and it was another winning year. Is it time to sell biotech now?

The trade that we identified is the S&P Biotech ETF, XBI. XBI holds more than 100 biotech stocks. This ETF is composed so that the 100 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.

XBI most recently triggered a Stock State Indicator (SSI) Entry signal in June 2016 when the stock was trading under $60. The stock is up almost 50% since then, and hit a new high of $88.51 last week. The Volatility Quotient (VQ) is 27.4% which puts it in the upper level of medium risk.

To refresh your memory, here’s the trade: Since 2007, buying XBI in February and selling it in September, has resulted in 11 straight winning trades. This year, the XBI trade was closed with a profit of over 27%. The average annual profit for the 11 year run is almost 18%.

Now what? If you’re holding XBI should you get out until next February? The rules of the trade say yes. But, let’s look and see if this might be the time to break the rules.

In the ten annual periods from September-to-February, XBI hasn’t performed nearly as well. The average gain during this 10-year period of time is only 1.67%. Half the time, XBI has made money, and half the time it has lost money. One year, 2015, it lost a lot of money.

Looking at the volume-at-price chart shows the top of very strong support to be in the $72 range. That’s very close to the top of the SSI Yellow Zone which is $73.95.

The time-cycle forecast is showing that XBI could drop into the end of November before turning higher into the first quarter of 2018.

This time-cycle chart was first published back in April. The blue line shows what has happened since April. The time-cycles have been forecasting the price well.

We could definitely see XBI take a breather here. The cycles and the seasonals, both support the idea of a pullback, as does the fact that XBI is up 25% in the past 6 months.

Given the strong bullishness of XBI overall, however, a pullback into the low $70 range looks like a very attractive buying opportunity to me … especially if it dips near $70, and rises back above $75 again.

Finally, I’m speaking twice today at Harry Dent’s Irrational Economic Conference in Nashville. It’s always a pleasure meeting with current TradeStops members, and welcoming new members into the TradeStops family.

I love the theme of “irrationality” but probably for a different reason than most others. I believe that the irrationality of the markets is what creates our opportunities as investors.

It’s like Kipling said in “If”…
“If you can keep your head when all about you
Are losing theirs…”