At the conclusion of QE2, many investors are expecting a broad market sell-off. The Economic Times just reported the results from a recent analyst survey. The survey found that a majority of analysts believe that the end of QE2, which is expected to occur next month, will likely hurt stocks and bonds.
Over the coming days, I anticipate others here at Seeking Alpha will continue to debate how the end of QE2 will affect the broader market.
What cannot be denied is that many stocks have seen nice runs this year. It also cannot be denied that many of the biotech names have had a super 2011. Look around and you’ll find a slew of individual biotech stocks that are way, way up.
When evaluating opportunities, long and short, in the biotech industry, I often reference the iShares Nasdaq biotechnology ETF (IBB) as well as other optionable biotech ETFs. Right now, IBB is trading at ALL-TIME highs.
- Shares of IBB started trading on February 9, 2001, opening at $100.40 and closing at $101.05.
- On June 5, 2001, IBB hit a high of $109.30.
- After nearly a decade, IBB finally penetrated the 2001 high on April 28, 2011 and hit a new all-time intraday high of $109.60. Wow.
- A couple of weeks later, on May 12, IBB retested its new high.
- The next day, Friday, May 13, 2011, shares established another new all-time high of $110.02. Since then, shares have pulled back and remained range bound.
So, if you bought shares of IBB back at the 2001 high, it would have taken you a cool ten years to make $0.72, presuming of course you sold at the new high on May 13, 2011.
As evidenced by the monthly chart below, IBB has pretty much gone straight up over the past 11 months. In July 2010, shares of the fund bottomed at $74.50. From the July 2010 low to the May 2011 high, shares have gained $35.52 or just over 47% and without a correction.
After an 11 month run, I think IBB is due for a healthy correction. From my view, it makes sense for IBB along with other stocks and funds to sell-off sharply next month (June 2011) at the conclusion of QE2.
Historically, IBB tends to fall between 10% and 20% from its high during the first month of a correction. If history repeats itself - and I believe it will - IBB should fall somewhere between $88 and $99 in June.
IBB Monthly Chart as of close on Wednesday, May 25, 2011.
June 2011 marks the end of QE2. This provides larger investors with a good reason to take profits. I anticipate they’ll do just that and many biotech stocks will be sold off.
In June, I believe we’ll see shares of IBB fall sharply and end up trading somewhere between $88 and $99. I’ll be looking for IBB to bottom at or below $88 in July or August. So, stay tuned.
Disclosure: I am short IBB via put options.