By Michael Kahn
As stocks recovered from the October plunge, the biotechnology
sector quickly jumped back into its leadership role. The iShares
Nasdaq biotechnology exchange-traded fund (ticker: IBB) moved to an
all-time high with a rather clean technical pattern breakout. With
solid absolute and relative performance, it would seem that biotech
is the place to be whether the market continues to rally or lapses
back into weakness.
This provides a quandary for investors. The short-term looks
rather hot but after leading the market for the entire duration of
the 2009-2014 bull run, the sector looks a bit scary.
In the short-term, buying the breakout looks to be a good
strategy, especially when the sector ETF negated a technical
breakdown just two weeks ago (see Chart 1). In technical analysis,
failed breakdowns are usually bullish signals and so far that seems
to be the case here.
The NYSE Arca Biotechnology Index (known as the BTK index),
which has a much longer data history, shows an even stronger
short-term pattern than the Nasdaq biotech ETF. However, in the
long-term we can see something a bit more sinister. The rally since
2011 has been accelerating leaving a dangerous pattern for bulls
and bears alike (see Chart 2).
A rising trend is a good thing and in the market, as in physics,
a body in motion tends to stay in motion. An entire subset of
trading is predicated on following the trend and we all know the
mantra "the trend is your friend."
But when a trend accelerates, its slope on the charts gets ever
steeper -- and unsustainable. Momentum takes over as investors jump
in at any price so as not to be left behind. Clearly, the
acceleration in biotech today is not the same as it was in weeks
leading up to the final blow-off at the end of the bubble in
1999-2000 but it is still of concern.
The problem is that these moves are nearly impossible to time.
The trend can last for weeks or months to come or it can turn on a
dime and lead to a very rapid descent. Both scenarios are just as
likely when we get a frothy market.
Again, biotech does not look to be in a true bubble but its
trend is indeed accelerating and it has been rallying for several
years at a rapid pace. Since beginning its steep rally in November
2011, the BTK index has more than tripled in value -- a 214% gain.
Compare that to the Standard & Poor's 500 and its 69% gain over
that same span. Plus, we can draw several progressively steeper
trendlines in the chart that should raise some concern.
With this in mind, let's take a look a representative individual
stock that still looks good on the surface but has a problem or two
behind the scenes.
Gilead Sciences ( GILD), which works in such areas and AIDS and
hepatitis research, set intraday and closing highs Friday (see
Chart 3). Considering that it happened after saving what appeared
to be a devastating trendline breakdown, investors should be quite
happy.
But on-balance volume, which keeps a running tab on volume
traded on up-days minus down-days, is still in decline since
August. This tells us that there was not as much power behind the
comeback rally this month as we would expect. We can infer that it
was a lack of sellers rather than a preponderance of buyers that
did the work and that is not a healthy way to rally.
Is that a reason to sell the stock? Not really. But it does warn
that something is not as rosy as the bulls would like. Jumping in
with both feet is probably not the right move, especially at this
stage in an old bull market.
Gilead announces earnings Tuesday after the close of regular
trading (See The Striking Price, " Gilead Stock Should Move Big on
Earnings Report," Oct. 27).
Biotech presents a problem in that the trend is still up but the
warning signs that it is getting old are starting to build. While
pockets within are getting news-related boosts as Ebola stays in
the news, overall to me it looks to be time to cut down on new
money being put to work here. Some money, yes, but not the same
heavy flow as before.
Getting Technical Mailbag:Send your questions on technical
analysis to us at online.editors@barrons.com. We'll cover as many
as we can, but please remember that we cannot give investment
advice.
Michael Kahn, mutual fund co-manager, author of three books on
technical analysis, former Chief Technical Analyst for BridgeNews
and former director for the Market Technicians Association, also
blogs at www.quicktakespro.com/blog.
Comments? E-mail us at online.editors@barrons.com
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