There’s no doubt vaccine headlines positively catalyzed stocks on Wall Street since the novel coronavirus shutdown much of the U.S. back in March. Specifically, biotech stocks have seriously benefited over the past 5 months. Companies such as Novavax (NASDAQ:NVAX) and Moderna (NASDAQ:MRNA) spring to mind; both stocks went from the brink of extinction to superstardom, respectively rallying more than 1000% and 400% from the March bottom.
Reactions to those headlines have been mostly beneficial to the stock market at large. Hardly anyone has reported negative news on the coronavirus vaccine front. Unsurprisingly, news has been overly biased to the positives, though companies have been reporting more granular information than usual.
Experts tell us that historically, getting vaccines to market takes years, yet consensus is that we are within earshot of one already. This would be highly unusual and therefore leaves stocks in these sectors especially vulnerable to disappointments.
I wrote about this in May just ahead of a small dip in the sector. But the buyers bounced right back and now the stocks are even higher.
Some of these are real companies with meaningful business aside from chasing down this particular vaccine. Pfizer (NYSE:PFE) to name one will do great long term regardless of how much this vaccine does or doesn’t contribute to the bottom line. The grave danger in the sector is among those stocks like NVAX whose entire future depends on a single play.
One way to invest in the sector is via ETFs. Their risk is spread across dozens of biotech stocks, so the vaccine hoopla shouldn’t make or break the long-term prospects. Here are 3 biotech stocks to buy:
- iShares Nasdaq Biotechnology ETF (NASDAQ:IBB)
- SPDR S&P Biotech ETF (NYSEARCA:XBI)
- Health Care Select Sector SPDR Fund (NYSEARCA:XLV)
There definitely are good levels to trade here, regardless of headlines.
Biotech Stock ETFs to Buy: iShares Nasdaq Biotechnology ETF (IBB)
IBB stock has remained stable despite being part of an industry that was headline prone way before 2020. Recently the bears took a small edge and broke below $133 per share, but the war rages on.
The bulls need to recover, else they could lose another $10. But all of this can be considered part of normal price action and doesn’t change the fact that the buyers have been in charge ever since the Covid-19 bottom in March.
The IBB chart shows plenty of support below current prices, all the way to $120 per share. Further, there are wide bands of support near $130, $126 and $119 per share. It would take extraordinary events for this chart to break below any and all of these lines. Control of this collection of biotech stocks still lies in the hands of the bulls, so dips are opportunities to buy.
Investors who are in it for the long haul should rest comfortably. Buying or adding to a position also makes sense here, albeit not all at once. There is extra extrinsic risk given that the stock markets in general are at all-time highs in spite of horrendous economic conditions.
SPDR S&P Biotech ETF (XBI)
XBI stock trades very closely with the IBB, except this ETF is more evenly weighted. No single stock can affect its price by more than 2%. Compare that with the IBB, whose top five stocks account for 35% of the equity.
The chart action in the XBI stock has also been consistent, so it has strong support at $107. Though this is not a forecast, if the bulls lose that level, they could extend the losses another 6%. Even if this happens, much like the IBB, these will be buying opportunities.
There’s plenty of support below current prices, certainly into $100 per share. The range of the current battle is tightening, setting higher-lows and lower-highs coming almost to a fine point. Usually when this happens energy builds and needs to resolve itself. What we don’t know is in which direction. Since the bulls have been in charge, the upside scenario has the edge, rather than another drop.
Therefore investors who are already long XBI can feel good. Those looking for a long-term investment should consider buying, even into this tug-of-war, because the buyers are prevailing. That much is evident from the long-term upward progression of the stock chart. This ETF is not made up of cheap companies, but so far they have been delivering on their promises and Wall Street has been gobbling them up.
There is a solid base around $100 per share that dates back five years. These pivot zones are typically reliable supports so even if markets see another meltdown this year the downside risk is finite.
Health Care Select Sector SPDR Fund (XLV)
XLV stock differs from our other picks because it is an ETF of healthcare companies. You can see the distinction on the stock chart. Unlike the other two, the XLV rising wedge still hasn’t given back any gains, so the bulls continued setting higher-lows over the past two months. This leaves it slightly more vulnerable to drops, and thus a riskier bet until it recedes some.
Trading stocks at their all time highs is tricky. Investors want to own the best but timing is sub-optimal. No one wants to be the last person in and wind up buying other people’s profits too late in the cycle.
Therefore, it is best to wait until the XLV retraces some of its recent profits, at least to $103.5 per share. This would place it back amid the July mini-breakout range. In fact, the closer to $100, the better the entry for this superstar stock. The July breakout is still ongoing but has stalled of late.
Investors these days have enough tools to pick the winning stocks, but what determines winning trades is timing. Stocks that rally too far without consolidation tend to be susceptible to sharp corrections and without morning.
The recovery from the March crash has been too sharp in the XLV stock. Some of it is justified but in the end the price action has to make sense. As much as I like the idea, I’d rather wait on this opportunity until lower prices in the XLV. If you aren’t long already, there’s no need to rush just because it’s hot.
Of the three today, XLV is my least favorite. Statistically, it is the worst off with regards to upside potential. It is lagging the other two in year-to-date statistics and still has not shed any froth inside this rally.
Nicolas Chahine is the managing director of SellSpreads.com. Join his live chat room for free here. As of this writing, he did not hold a position in any of the aforementioned securities.
