Biotech stocks (IBB) were the great outperformers in the stock market in the period between 2009 and 2014. In the summer of 2015 they set a major peak, and downhill it went in the following 12 months, only to stop falling 40 pct below their peak. As always, with such a crash, investors lose interest and financial media stop talking about the sector which they covered so gratefully when it was rising. As always, smart investors know the playbook, and get in during the consolidation period. 2018 is shaping up to become a great year, at least second half of the year, for biotech stocks, we are very bullish, and this is why.
The biotech index represented by the IBB ETF is setting a major cup-and-handle pattern. This is a textbook example of how a market crashes after a major top, recovers after a while, only to set another higher low. Usually, this pattern resolves in a bullish breakout, and, in the case of biotech, we are convinced the odds favor a bullish resolution.
The reason for our bullish stance is RISK ON market conditions. As explained in The Real News That Matters: Leading Stock Indicator Breaking Out in 2018 as well as Amazing but True: “Risk On” Indicator Turning Bullish, Good For Stocks our leading indicators continued to be bullish amid the strong correction in January and February of 2018.
As biotech is a very risk sensitive asset, and as sellers seem to lose control, we believe the second half of 2018 will start with a bullish breakout which will be confirmed once the IBB ETF rises above 120 points, a 9 percent rise from today’s levels.
The large biotech names look good, for instance Amgen. In the mid cap sector we still see value in Repligen. Theratechnologies has done amazingly well, but it’s a very high risk stock, similar to Puma Biotechnology. Why not just go for the IBB ETF if you like the sector instead of picking individual names which are mostly high risk.