The iShares Nasdaq Biotechnology Index (ETF) (IBB) Is Ready to Bounce!

Risk assets have been smacked hard to kick off 2016, and there have been few places to hide. Biotech stocks — as represented by the iShares Nasdaq Biotechnology Index (IBB) (NASDAQ:IBB) — have led the market higher for the past few years. However, biotech stocks topped out last summer, and the pain has continued in 2016; despite Thursday’s bounce, the IBB remains lower by about 14% year-to-date.

The IBB etf earlier this week reached some near to medium-term support levels where a better bounce could result from – active investors take notice.

Beat the BellIt is rare to see a single industry group remain a market leader in performance for more than a year or two, yet biotech stocks have done just that since 2011 until finally beginning a mean-reversion process lower last year. To be sure, the IBB ETF in 2015 still closed higher by about 10%, but as we will discover on the following two charts, the price action last year set in motion what’s likely to be a much more challenging time ahead for 2016.

Just like I discussed yesterday with shares of Tesla Motors Inc (NASDAQ:TSLA), I do believe that biotechnology as an industry will continue to flourish through the longer-term.

However, most arguments around stocks and other asset classes could be put to rest if we simply understood where each market participant’s time-frame focus is. So, let me be clear that I think biotech stocks …

  1. Could bounce in the near- to medium-term.
  2. Will likely face headwinds through a three- to nine-month lens.
  3. Will at some point later in 2016 or 2017 become great longer-term investments.

Bullish sentiment in biotech stocks had gotten so strong by 2014 that at the time I met several near-retirement-age investors who were 100% allocated to the industry.

Risky? Yup.

Stupid? Probably.

While the IBB ETF has fallen more than 30% off its summer 2015 highs, bullish sentiment in the industry (at least by my measurements) has hardly budged. For me, this is at least one reason why biotech stocks likely will need to fall more in 2016 before a better uptrend can once again begin.

IBB ETF Charts

The multiyear chart of the IBB ETF shows that the 30% drop since last summer has now mean-reverted it back to an important horizontal support area, which previously acted as resistance (in 2014). Downside momentum too is increasingly oversold, and a relief bounce for now looks to be near.

IBB ETF chart weekly
Click to Enlarge

Zooming in on the daily chart we see that the IBB ETF on Wednesday marginally broke and closed below its August/September 2015 lows near $285. On Thursday, the ETF sold off again and broke further below Wednesday’s lows, only to quickly reverse back higher.

IBB ETF chart daily
Click to Enlarge

Yes, this bullish reversal coincided with an oversold bounce in the broader market, but if this technical area can hold as support on a weekly basis, then a better oversold bounce toward the $312 area could quickly become reality.

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