Biotech ETFs: Volatility, Technicals Pointing to a Recovery?

Volatility describes how fast stock prices move throughout the trading day. When prices swing wildly, the market is "volatile." In contrast, when prices move mildly in one direction or another, they are not volatile.

Most investors prefer calm; few seem to mind an occasional pebble in the water. However, "down-up-down-up" 300+ points rarely warms an investor's heart.

On March 20, I suggested that extreme levels of volatility may have marked the elusive "bottom." In essence, I uncovered that the bottoms of the previous 6 bears occurred in a month where 50% of the last 90 days had volatile price movements in excess of 1%. By March of 2008, we had reached that level.

Another thing happened on the way to the March bottom. The CBOE Volatility Index, or VIX, had spiked to a 5-year high. I've discussed VIX spikes in previous columns. In particular, I noted that when the VIX spikes above 30, and settles down shortly thereafter, one typically is afforded a tremendous buying opportunity.

This is because the VIX is actually a measure of fear. When the VIX is steadily climbing, stocks are usually falling. Then when the VIX spikes ever higher in a fit of rage, stocks typically get rocked. (Witness the VIX spikes of January 08 and March 08, effectively announcing market lows.)

The March lows alongside the Bear Stearns (BSC) debacle served up a unique set of circumstances. Namely, we've witnessed the Dow garner 1000 points and the S&P pick up 100+.

These gains were by no means predictable from volatility alone. In fact, it wasn't until the VIX slipped below 25 that confidence appears to have been restored.

Nevertheless, investors have to be cognizant of things like the CBOE Volatility Index (VIX). One way that I stay on top of it is by reading Bill Luby's columns at his VIX And More web log.

Luby suggested in a recent post that the Biotech HOLDRs (BBH) have experienced an unusual level of volatility, and may be ready for a turnaround. If so, it would likely be due to two companies, Genentech and Gilead, which collectively account for 50% of BBH's movement.

If it's the Biotech HOLDR that's generating a "volatility-centric" buy signal, what about the entire biotech sector? State Street's Biotech SPDR (XBI) may, in fact, be serving up its own uptrend. XBI has not only climbed above its short-term 50-day moving average, it recently eclipsed its long-term 200-day moving average.

Disclosure: The author is president of Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, which may hold positions in the ETFs, mutual funds and/or index funds mentioned above.