Biotech stocks have been a hot topic for much of this year, as stocks fell throughout January only to rebound and pull back, then rebound and pull back again.
The exchange-traded fund iShares NASDAQ Biotechnology Index (IBB) formed a double-bottom pattern in February and March, and is now sitting on key support as it attempts to form its second double-bottom pattern of 2016.
Looking at the industry from a technical perspective, it’s imperative that current support holds. As you can see in the chart below, not only has the recent weakness taken IBB back to the lows of May, but it has also pushed the relative strength index (RSI, circled at the bottom of the chart) to near oversold territory.
This is a signal that IBB is near a bottom, and if support holds it would be a significant buying signal for biotech stocks as a whole.
On the upside, we’re looking at resistance around $290, which is a level the index has struggled to break above the last few months. The 200-day moving average (the blue line) is just above $290, and it would serve as another point of resistance should IBB rally.
Troubles for Biotech Stocks
I think the main reason we’ve seen the industry struggle recently is because of underperformance in the Big Four — Amgen, Inc. (AMGN), Gilead Sciences, Inc. (GILD), Celgene Corporation (CELG) and Biogen Inc (BIIB). Amgen in particular, with its $113 billion market cap, is down 8.5% so far this year, which weighs heavily on the entire sector.
However, with the valuations of these big names so low (AMGN’s price-to-earnings ratio is 12.2, well below that of the sector and the S&P 500), I believe the weakness is actually an opportunity — one that current and probably short-term Brexit-based losses are exacerbating.
Regardless of what the charts, technicals and ratios are telling us, I love the biotech industry from a big-picture standpoint, especially as mergers and acquisitions activity heats up.
Many of the big-name pharmaceutical companies are sitting on hordes of cash, and rather than relying on only the drugs they can develop in-house, they’re looking toward the small- and mid-cap companies with drugs in the developmental stages to fill their pipelines. This has led to plenty of takeovers in recent years, and I expect the trend of Big Pharma paying hefty premiums for the smaller companies to continue.
From a fundamental perspective as well as a technical perspective, I think the biotech sector as a whole is a great long-term buy.
As of this writing, Matt McCall did not hold a position in any of the aforementioned securities.