The hottest sector in the market over the last year has been
the biotech stocks. Not even the market sell-offs have been able
to force the sector to crack the uptrend it has been trading
within over the last several years.
That being said, the sector is in the midst of a healthy
pullback that is opening up an opportunity for investors to buy
at a discount. The iShares NASDAQ Biotechnology Index ETF (NYSE:
) has pulled back six percent from an all-time high in the last
Even with the pullback the ETF still maintains a gain of 15
percent for 2014, versus a gain of less than two percent for the
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What makes the pullback even more attractive is that the ETF
has not breached the 50-day moving average and is holding above
the previous high in the uptrend. The same pattern has occurred
five times in the last year and each time the ETF rallied to hit
new highs. Finally there is one more indicator on the chart that
suggests the ETF will hold support and continue the uptrend - the
The RSI is an oscillator that helps determine when a stock is
overbought or oversold based on its past price action. When the
RSI moves out of oversold territory it frequently suggests the
end of a pullback and is a buy signal. IBB is flashing an RSI buy
signal this week as it bounces off support. This is a high
probability buying opportunity for both swing traders and
The pattern for the Market Vectors Biotech ETF (NYSE:
) is nearly identical to IBB and it is also flashing an RSI buy
signal this week. The two ETFs share four of the same top five
holdings and should return similar results in the months ahead.
One difference is that BBH has a higher concentration in its top
holdings versus IBB, but it does charge a slightly lower expense
ratio (0.35 percent versus 0.48 percent).
There are other ETFs in the sector that are forming similar
patterns on the charts. The SPDR S&P Biotech ETF (NYSE:
) is down seven percent from its recent high and is starting to
bounce off support as it flashes an RSI buy signal. The ETF has
been one of the best performers in the market this year, with a
gain of 23 percent even though it has pulled back the last two
weeks. The one difference between XBI and the other biotech ETFs
is that it has a much more choppy pattern with deeper sell-offs
and more pronounced rallies.
Historically XBI would not be as volatile, but one of its top
holdings, Intercept Pharmaceuticals (NASDAQ:
) is up 561 percent this year and it has had the ETF on the move.
Due to the big move this year the stock now makes up 8.3 percent
of the portfolio with the number two holding only accounting for
2.8 percent. The ETF will rebalance the portfolio quarterly and
the position in ICPT will be lowered to less than three percent
of the total allocation.
Investors looking to enter the biotech sector now could
realistically expect market-beating gains in the months ahead.
However, they must also realize the magnitude of the gains may
not be on the same level as they have been in the past couple of
© 2014 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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