Biotech stocks — as represented by the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) — were one of the standout performers in Monday’s trading session, rallying more than 2.5% on the day. While the IBB ETF has also seen a good-size rally off the February lows, it has yet to mean-revert to or reconnect with its 50-day simple moving average — a feat that most other parts of the market has already accomplished.
Although the broader market is in overbought territory for the immediate term, biotech stocks may be able to play some catch-up in coming days or weeks.
I have highlighted it several times in this column in recent weeks and will say it one more time: Bear market rallies have a tendency to be sharper and longer lasting than most bears bargain for. When pessimism gets too high and markets bounce, short sellers get squeezed and hopeful bulls buy stock. All of this results in sharp pushes higher.
However, these bear market bounces also offer healthy mean-reversion moves that reconnect stocks and indices with their medium-term moving averages and trendlines before ultimately resuming lower.
Indeed, in this most recent rally, most indices such as the S&P 500 and many industries and groups have reconnected or nicely overcome their respective 50-day simple moving averages. This is not yet the case with biotech stocks such as Gilead Sciences, Inc. (NASDAQ:GILD), and therein could lie an opportunity for the active investors and traders among us.
iShares Nasdaq Biotechnology Index (ETF) (IBB) Charts
Before looking at the near-term opportunity in the IBB ETF, note that the mean-reversion move on the multiyear chart from the summer 2015 highs into the February lows measured just about 40%. While that’s a significant drop in percentage terms, if we look at the entire move from the 2009 lows up to the 2015 highs, the IBB so far has not yet retraced 50% of the entire move, which healthy cyclical bear market retracements in hot go-to stocks have a tendency to see.
While the above chart ultimately argues for a resumption of the intermediate-term downtrend, the IBB’s daily chart showed some promising signs on Monday.
Over the past couple of weeks, we have seen good rotation from one sector and industry to another, and on Monday, biotechnology stocks finally saw some pop. Note that the IBB on Monday marginally closed above multiweek horizontal resistance and is now steering toward the yellow 50-day MA. Just above there is horizontal resistance (i.e., former support from August and September 2015.)
Active investors and traders could try to buy some IBB here with a first price target in the low $280s, keeping in mind that a) the bounce remains counter-trend from an intermediate-term perspective and that b) the broader stock market is increasingly overbought in the near-term.
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