Already under significant pressure, the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB), which tracks the Nasdaq Biotechnology Index, and rival biotech exchange traded funds face a predictable result of what has become a challenging fundamental environmental for biotechnology stocks: Technical challenges.
As ETF Trends reported Tuesday, ETFs that track smaller biotech companies also got the worst of the selling. Since June 6, the BioShares Biotechnology Clinical Trials Fund (NasdaqGM: BBC), which tracks potential up-and-coming biotechnology companies that are in the clinical trials stage, fell 14.4%. The ALPS Medical Breakthroughs ETF (NYSEArca: SBIO), which focuses on small- and mid-cap companies that have one or more drugs in either Phase II or Phase III U.S. FDA clinical trials, declined 12.2%.
Related: Big Biotech Selloff
Multiple factors, including politics, are pressuring biotech stocks and ETFs this year. Election year posturing over drug prices represents a significant headwind for the healthcare sector and that is something biotech ETFs like IBB have already proven vulnerable to. Just go back to September 2015 and refer to Hillary Clinton’s Twitter feed.
“Once support broke and Bio-Tech kissed the underside of resistance at above, sellers stepped in and this leading upside sector, now has been a leader to the downside since July of 2015. Once weakness started taking place in this sector, broad markets did the same,” according to Chris Kimble of Kimble Charting Solutions. “Now Bio-Tech IBB could be forming a “Bearish Descending Triangle” with a key test of support taking place right now.”[related_stories]
The technical challenges and election year posturing facing biotech ETFs belies what some believe is still a bullish long-term investment thesis. The improved outlook for the health care industry comes as many expect continued growth in the sector, despite an ongoing so-called earnings recession in the S&P 500. While FactSet anticipates the broad S&P 500 to show an earnings decline of -9.1% for Q1 2016, the health care sector is expected to report revenue growth of 8.9%.
Related: Resisting Biotech ETFs
Still, the biotechnology sector has been among this year’s worst performing areas of the market as investors shifted out of high-flying growth stocks in face of increasing market uncertainties for more value plays. IBB decreased 23.5% year-to-date.
“If sellers step forward and IBB/SPX breaks support, it would reflect new found downside leadership from this key sector, which could spill over into the broad markets,” adds Kimble.
For more information on the biotech sector, visit our biotechnology category.
iShares Nasdaq Biotechnology ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.