Since March 2009, the NASDAQ Biotechnology Index (NBI) has staged one of the most impressive rallies ever seen. With a rise of 2,267 points since its 2009 low of 606, the NBI has risen by 374% to a peak of 2,873 set in February. By comparison, this performance outpaced the S&P 500 Index and the Dow Jones Industrial Average, which scored gains of 198% and 165% respectively during the same period. Rapid technical improvements within the biotech world as well a demographic environment that favors that sector clearly contributed to the success of the NBI on a relative basis. A zero percent interest policy also helped, but it was nevertheless a plus for all equities as well.
In any event, Fed Chair Janet Yellen appeared to cause quite a stir last week with her comments regarding the biotech sector suggesting that valuations of equities in that arena are now “stretched, with ratios of prices to forward earnings remaining high relative to historical norms.” While a debate by a number of biotech analysts erupted shortly thereafter, perhaps it was the long-term chart of the NASDAQ Biotechnology Index that also caught her eye.
From the standpoint of technical analysis, there is a cautionary case that could be made for biotech stocks. First off, the NBI is sitting roughly 11.75% below key channel-top resistance on long-term charts. While monthly stochastic and RSI studies are now positioned negatively, it is interesting to point out that long-term MACD (Moving Average Convergence & Divergence) is at an all-time high and still edging higher. That being said, the fact that MACD has now superseded its prior peak of September 2000 is a bit worrisome. MACD will likely carry more importance if and when it crosses down bearishly and is perhaps accompanied by a break below key trend line support that currently sits at 2,380 (but rises over time).
Until then, it is always possible that the NASDAQ Biotechnology Index could notch an 11.75% gain from current levels. Still, this technical set-up deserves attention either way.