Beware Biotech
Key points
- Biotech has entered a short, unfavorable time of year
- Likewise, this sector has tended to perform poorly when Stock Risk Levels are high
- While the current confluence of indicators guarantees nothing, they do suggest that caution may be in order in the short run for this volatile sector
IBB has entered a short but generally unfavorable time of year
The chart below displays the annual seasonal trend for iShares Biotechnology ETF (IBB)
The red box highlights the period that extends from the close on Trading Day of Year #145 through TDY #159. For 2023 this period extends from the close on 2023-08-1 through the close on 2023-08-21.
The chart below displays the hypothetical cumulative $ +(-) from holding a long position in IBB only during this unfavorable period every year since 2001.
The table below summarizes IBB's performance during this unfavorable period.
Medium-Term Risk Levels also cast a short-term pall
Our Medium-Term Risk Levels indicator is heavily based on the spread between the Smart and Dumb Money Confidence indexes. The chart below highlights when the Medium-Term Risk Levels indicator was equal to nine versus IBB.
The table below summarizes IBB performance following all readings of 9.
The sample size is relatively small, so this should not be as some trading "signal." Still, Average and Median Returns are negative for each time frame out to three months. Two months have shown only an 8% Win Rate. Combined with the unfavorable seasonality above, this suggests short-term caution in biotech.
What the research tells us…
No indicator or combination of indicators guarantees anything, particularly when dealing with short-term time frames and relatively small sample sizes. Nevertheless, the confluence of indicators highlighted above suggests that a trader should have an excellent reason for wanting to jump into the long side of the biotech sector in the near term. On the other hand, if the sector declines in the weeks ahead, it may set the stage for a decent rebound.