Biotech Stock ETF Due for a Correction

by: Justin M. Hall

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.

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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.

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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 (NASDAQ: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.

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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.

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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.