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ETF Outlook: SPDR S&P Biotech ETF (XBI)

Every Wednesday, Marc Chaikin applies his groundbreaking analysis to an ETF or a sector. Today, he looks at SPDR S&P Biotech ETF (XBI).

The Biotech Group has been underperforming the overall stock market since mid-March when momentum investors fled the group. There were references to over valuation in Biotech stocks in a Federal Reserve statement by Fed Chairman Janet Yellen. Intense selling brought down the good with the bad Biotech stocks and saw the XBI drop over 30% in 5 weeks to an April low which tested the 12 month price lows made for the XBI in October-November of 2013. The XBI has spent the past 4 months rebuilding and succeeded in retracing 75% of its decline but once again experienced heavy selling pressure on 7/16 and 7/17.

This group is still lagging the overall market and is also vulnerable to further weakness in small-cap stocks. The XBI is coming off an overbought condition and could experience further declines if the market reverts to the downside. The larger capitalization stocks in the ETF like Amgen (AMGN), Celgene (CELG) and Gilead Sciences (GILD) are significantly outperforming the smaller cap Biotech stocks.

This underperforming group is a good short sell candidate. In addition our Portfolio Health Check can help you zero in on the strongest and weakest stocks in the XBI and trade on the right side of the market with those bullish stocks, while avoiding or shorting the bearish rated ones.

The Chaikin Power Bar below indicates that only 8 stocks in the XBI have a bullish Power Gauge rating while 33 have a bearish rating.

Investors who want some participation in the Biotech Group should avoid the XBI ETF and buy the strongest stocks in the XBI, based on their Chaikin Power Gauge rating, preferably on short-term pullbacks. These stocks are likely to outperform the market and the XBI ETF itself.

The Portfolio Health Check is an excellent tool to help zero in on the strongest stocks in any ETF and with the SPDR S&P Biotech ETF (XBI) showing a plurality of bearish, small-cap stocks, it is the most effective way to identify stocks to avoid in the XBI.

By looking at the individual component stocks through the lens of the 20 factor Chaikin Power Gauge rating, you can easily find the stocks in this underperforming ETF with the weakest potential over the next 3-6 months. These are the stocks to avoid as this weak sector is likely to continue to underperform.

The Chaikin Power Grid in Portfolio Health Check (see below) maps stocks and industry groups from strong to weak so you can easily determine the best and worst stocks in any ETF. To find the strongest stocks in the XBI, we look to the right quadrant of the Power Grid (strong Power Gauge stocks) where we find stocks with the best potential for price gains over the next 3-6 months. Our favorites in this ETF include Amgen and Gilead Sciences. These stocks are pulling back in a quiet market and may provide long entries on weakness over the next few days.

The weaker stocks in the XBI include: Cubist Pharmaceutical (CBST), Cepheid (CPHD), Incyte (INCY), ISIS Pharmaceutical (ISIS) and MannKind (MNKD), which should be avoided.

Over time, strong stocks in strong industry groups will outperform weak stocks in weak groups.

One stock to avoid in the weak Biotech group is Incyte Corp which recently triggered an Overbought Sell Signal in Chaikin Analytics at 48.84. INCY reported a disappointing quarter on 7/31, missing analyst estimates of $0.05 while reporting a quarterly loss of $-0.22. The company also missed revenue estimates badly reporting revenue of $100 million vs. expectations of $141 million.

Stocks with bearish Power Gauge ratings which report disappointing earnings in a weak industry group are a losing bet, particularly when there are stocks like Amgen with bullish ratings in the same group.

A better alternative for participation in this underperforming group is Amgen which reported better than expected earnings on July 29 and spiked up 5% to a new all-time high of 130.01. AMGN beat analyst estimates by 15% for the 2nd quarter by producing a 25% jump in earnings on an 11% increase in revenue. Our Power Grid would have identified AMGN as an attractive stock before they reported earnings and spiked higher.

Amgen is working off its oversold spike and is an attractive buy candidate on any further pullbacks.


Chaikin Portfolio Health Check

Chaikin Power Gauge rating

NASDAQ Chaikin Power Indexes

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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