Market observers are abuzz regarding the recent weakness in biotechnology stocks and the related exchange traded funds. It is easy to understand why.
Healthcare is this year’s top-performing sector after being second-best last year, which is to say the group has been an important driver of U.S. equity returns in recent years. Add to that, healthcare, meaning mostly biotech, is 14.6% of the PowerShares QQQ (NasdaqGM: QQQ), which tracks the Nasdaq-100, and has played a pivotal role in that ETF’s recent rise to record highs.
Unfortunately for biotech bulls and those looking for signs of increased risk-taking within the healthcare sector, the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT) and the SPDR S&P Biotech ETF (NYSEArca: XBI), the three largest biotech ETFs by assets, are off an average of 5.6% over the past week. [Run not Done for Biotech ETFs]
The $8.37 billion IBB, the largest biotech ETF, is clinging to its 50-day moving average. If unable to continue doing so, IBB could face significant downside pressure as eager biotech bears pounce on the benchmark ETF’s technical weakness.
“The bigger issue for the US equity market today is the biotech stronghold and whether or not it holds the 50-day moving average and keeps its strong uptrend intact. If not, that technical breakdown is simply going to cause a more painful rotation in a notorious momentum sector,” said Rareview Macro founder Neil Azous in a note out today.
Since the start of this month, flows into and out of biotech ETFs have been mixed with IBB and XBI losing about $236 million combined while FBT has added $142.5 million in new investments. Investors have also allocated new money to both leveraged biotech ETFs with the ProShares Ultra Nasdaq Biotechnology (NasdaqGM: BIB) seeing $31.1 million of April inflows. BIB’s bearish equivalent, the ProShares Ultrashort Nasdaq Biotechnology (NasdaqGM: BIS) has added $13.1 million in assets this month. [Getting it Right and Wrong With Leveraged Biotech ETFs]
Proving that earnings have recently meant nothing to biotech investors, shares of Amgen (NasdaqGS: AMGN) are down 4.6% over the past week, a time frame that includes the company saying first-quarter EPS surged 50%. Amgen also boosted its 2015 guidance.
Shares of Biogen (NasdaqGS: BIIB) have plunged 10% over the past week with losses accelerating after the company said first-quarter profits jumped 71%. IBB has a combined weight of 15.7% to Amgen and Biogen.
“To be clear, the move lower in the Biotech space at this point is more than manageable in the context of the long-term uptrend. Yes, it will cause short -term PnL duress but just be mindful to not get too carried away with Biotech bearishness even on correction if that were to truly materialize,” adds Azous. [Must See Biotech ETF Chart]
iShares Nasdaq Biotechnology ETF
