Biotechnology stocks and exchange traded funds have plenty of detractors that, primarily citing lofty valuations for an industry that is almost always richly valued relative to the broader market, think declines are on the way.
Biotech ETFs also have plenty of supporters. That much is highlighted by today’s price action. To this point in Wednesday’s trading session, 26 ETFs have made all-time highs, 22 of which are healthcare funds. Of those 22, 10 are biotech funds. One of those 10 is the First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT), the second-largest biotech ETF by assets. [ETFs for Biotechs Loved by Hedge Funds]
FBT is up 27.6% this year and has hauled in over $1 billion in new assets, one of the best totals of any industry or sector ETF. Those data points could, arguably, indicate that FBT’s run is getting long in tooth, but the opposite might be true.
Dana Lyons of J. Lyons Fund Management notes that the NYSE Biotech Index, FBT’s underlying benchmark, is forming a bullish cup-and-handle chart pattern.
“So what is the significance of a ‘cup-and-handle’? It is generally a bullish chart pattern that often times leads to explosive moves higher. The gist is that after a relatively long, and normally ‘rounded’ pullback from the original peak, prices return to hit the same level, forming the ‘cup’. Prices not surprisingly are repelled temporarily by the previous peak levels. However, they return to the peak levels again in relatively short order (the handle). The resiliency in prices to remain near the top of the range is a suggestion that they will eventually break through. Yes, there is a possibility of a triple top in such instances. However, we have found triple tops to be about as common as unicorns,” said Lyons in a recent blog post.
In the essence of simplicity, here is the potential for added upside for FBT: “In the case of the BTK, the range from the top to bottom of the cup would be roughly 600 points (4326-3728). That would target about 14% above the top of the cup here and would bring the index up into the vicinity of the 5000 level which would be a nice round number target,” according to Lyons.
With FBT currently trading just over $130, another 14% would carry the ETF to the $148 area. That for an ETF that has more than quadrupled over the past five years while being one of the top-performing ETFs since the March 2009 market bottom. [Biotech ETF Run not Over Yet, Says Analyst]
FBT holds just 30 stocks, making it one of the smallest biotech ETFs in terms of number of holdings. The fund’s constituents range in weight from 2.65% to 4.71% and include Regeneron (NasdaqGS: REGN), Gilead (NasdaqGS: GILD) and Celgene (NasdaqGS: CELG).
Chart Courtesy: J. Lyons Fund Management