Biotechnology stocks and the relevant exchange traded funds were once again beloved and controversial during the first quarter.
Beloved because biotech ETFs, until the tail end of the quarter, continued delivering stellar returns. When the first quarter ended yesterday, five biotech ETFs were found among the quarter’s top 10 non leveraged sector ETFs with the SPDR S&P Biotech ETF (XBI) and the First Trust NYSE Arca Biotechnology Index Fund (FBT) also ranking among the quarters top 10 non-leveraged ETFs of any stripe. [An ETF to Quiet Biotech Critics]
However, biotech ETFs remained controversial amid cacophony of valuation concerns. As was the case in March 2014, March 2015 brought increased chatter that biotech’s lofty valuations make the group vulnerable to significant downside.
Amid the debate, traders and investors would do well to turn to the charts for clarity, though biotech bulls might not like what the chart of the iShares Nasdaq Biotechnology ETF (IBB) , the largest biotech ETF, has to say.
On a monthly basis, IBB “could be creating the largest reversal pattern (bearish wick) in its history. Even if it’s not #1, it’s a biggie. This potential reversal pattern is unfolding at a steep rising resistance line as well as its taking place at a long-term Fibonacci extension level. As you can see monthly momentum is at level not seen in the history of IBB,” according to Chris Kimble of Kimble Charting Solutions.
In other words, IBB could be poised to form an ominous Eiffel Tower chart pattern. One need not visit Paris to figure out that securities that form Eiffel Tower patterns reward short sellers and those that stay on the sidelines, not longs.
“Biotech is an obvious example of the momentum trade. It is a high ‘beta’ or risky industry that has been a strong relative performer for many years. Through the close of the week ended March 20, the Nasdaq Biotech Index had surged 20% year-to-date. The following week, despite a relatively modest pullback in stocks, the Nasdaq Biotech Index fell roughly 5%,” said BlackRock Chief Investment Strategist Russ Koesterich in a recent note.
IBB fell 6.3% from March20 through March 31, meaning the ETF would need to fall another 3.7% to meet the standards of an official correction. Investors poured almost $539 million into the ETF during the first quarter. [A Bold Call on Biotech ETFs]
iShares Nasdaq Biotechnology ETF
Chart Courtesy: Kimble Charting Solutions