Since the summer of 2015, the Biotech industry has seen its worst drawdown since the 2000-2002 bear market. Additionally, the industry has failed to participate in shorter-term broad market rallies since that same peak in mid-2015. Is this combination of weak performance and a lagging of broad market rallies a warning signal or a potential buying opportunity?
The following chart is the drawdown of the S&P Biotechnology Index, the benchmark for XBI (SPDR S&P Biotech) since the market bottom on 10/9/2002:
While the industry has experienced its share of volatility and drawdowns over this period, this recent selloff has been the worst of the bunch on an absolute basis. But how about on a relative basis? Here is the same chart with the drawdown of the S&P 1500 added:
While the 2007-2009 biotech drawdown was significant, the industry held its own relative to the broad market. So this recent drawdown is more reminiscent of that which occurred in 2004-2005 and mid-2014, where the broad market held up while biotechs did not.
However, an alternate view of this which also takes the upside performance differential into effect is looking at the ratio of the S&P Biotech industry versus the S&P 1500. When moving up, biotechs are outperforming and vice versa.
From the summer of 2007 through summer of 2014, biotechs experienced a mostly steady outperformance relative to the S&P 1500, with the main exception being the ‘blip’ in the middle of the chart. This corresponds with the 2008 market selloff, where biotechs held up during the selloff but then the broad market caught up in the February-October 2009 period.
However, the recent moves in biotechs have been anything but steady. This started with the exponential move higher starting around July 2014 and then the subsequent selloff. Here are some relative performance numbers since 7/17/2014:
After over doubling from July 2014 to July 2015, the biotech pullback has brought the performance nearly in line.
Where does this leave us today? While this recent drawdown has been significant, it was coming off such a rapid appreciation. So which move was ‘correct’ – the rapid appreciation or the rapid selloff? Based on this longer-term chart, it seems as if biotechs are more inline – or potentially under – the longer term slow trend higher. Therefore, while it seems a correction may have been due, the magnitude of said correction may also be a bit overdone.
That then begs the question of are biotechs poised to continue the longer-term trend higher? Alternatively, are we going to enter a state more similar to the 2002-2007 period where relative performance trends more sideways?
While trying to break higher versus the S&P 1500 two separate times since its February 8 low, ultimately the Biotech index is still underperforming said index by roughly 2.5% since that date through March 18. Will the third attempt to break higher be the charm, or will it be three strikes and then a continued relative move lower? Alternatively, is there a third option where we enter a more sideways chopping relative performance period? The remainder of the first quarter leading into the second quarter may be an interesting and revealing time for the industry.
Clayton Fresk, CFA is a portfolio management analyst at Georgia-based Stadion Money Management, a participant in the ETF Strategist Channel. The above constitutes the personal, professional opinion of Clayton Fresk, CFA, and does not necessarily reflect the views of Stadion Money Management LLC. References to specific securities or market indexes are not intended as specific investment advice.
Founded in 1993, Stadion Money Management is a privately owned money management firm based near Athens, Georgia. Via its unique approach and suite of nontraditional strategies with a defensive bias, Stadion seeks to help investors—through advisors or retirement plans—protect and grow their “serious money.” Contact Stadion at 800-222-7636 or www.stadionmoney.com.