ETF Update: Time for Biotech?

The main theme for this week continues to be playing defense -- continued strength in the inverse index ETFs and gold.  Market sentiment has deteriorated further, and there is, of yet, no good signal of a bottom.  The model did well in spotting these moves.  (Further explanation for new readers is at the end of this article.)

Meanwhile, a few sectors are showing some signs of life, including the iShares Nasdaq Biotechnology Index Fund (IBB).

Is it Time for Biotech?

Each week we try to feature a new sector on the buy list,  While the overall strength is not high, the IBB ETF qualified for fresh money this week.

The fund tracks the Nasdaq Biotechnology Index, which has a long list of holdings reflecting many different biotech approaches.  The overall concentration has about 37% in the top five holdings, with Amgen (AMGN) leading the list.

Kevin Depew, Executive Editor at Minyanville, notes the seasonality in biotech.  "The normal seasonal run for biotech typically begins in August, but we're seeing some demand creep in a smidge earlier this year."  If you check out his article, you will see a nice video with a panel discussion at Fox describing the reasons for the recent strength in these stocks.

Writing at The Trading Goddess site, Upside Trader notes that biotech is often a place to "hide out" in difficult times.

As usual, Tom Lydon is on the case, noting the move above the 200-day moving average.

To summarize, there are some good fundamental and technical reasons for investors looking for a sector rebound to consider biotech. 

Weekly TCA-ETF Rankings

There was only one change in the top five this week, with our last energy holding dropping out of the list.  In addition to the strength of biotech, several other health care ETFs are edging closer to the buy range.

It is still a very defensive picture.  The model shift to inverse ETFs has helped our position (and our blood pressure!) during some stressful times.  Using the model as our guide, we have continued our multi-week bearish posture in the Ticker Sense blogger sentiment poll.

Listed below are the week's rankings and our trades: 

Click to enlarge

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETFs and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETFs pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETFs.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Comments

[carey_jim]

My brief, non-technical comment on biotech is this:

The economic model driving the biotech industry and the pharmaceutical industry is deeply flawed. Until this model changes, biotech stocks will remain stagnant or continue to fall with other market sectors.

The history of the drug avastin provides a good example of the absurd tangle of greed and inefficiency that the FDA-biotech industry revolving door has produced:

Avastin costs $100,000 for use in treatment of colon cancer and prolongs life by two months.

Examples of this kind of economic absurdity can be multiplied into the hundreds.

The biotech industry is broken just as the American "medical system" or what passes for it is broken.

Don't look for a prolonged rally in biotech until it the economic model is changed for the better.