Biotechnology triggers an optimism index buy signal

Dean Christians

2022-06-28

Key points:

The Optimism Index for the Biotechnology ETF (IBB) reversed higher relative to its recent range
A trading model that uses the Optix Index triggered a new buy signal
The IBB ETF has rallied 84% of the time after other signals

Using the optimism index to identify bullish sentiment reversals

A trading model that uses the Optimism Index (Optix) to pinpoint when sentiment reverses from a period of pessimism issued a buy signal for the Biotechnology ETF (IBB) on 6/27/22.

Jason and Jay published two notes this year that made a compelling long-term case for buying beaten-down biotechnology stocks. So, we can include an additional checkmark to the bullish ledger with the new Optix buy signal. Please click here and here to read their notes.

A trading model that identifies a reversal in the optimism index

The model applies an 84-day range rank to the 6-day moving average of the Optimism Index for the IBB ETF. The range rank indicator measures the current value relative to all other values over a lookback period. 100 is the highest, and 0 is the lowest. The pessimistic reset condition occurs when the range rank for the Optix Index crosses below the 5th percentile. A new buy signal triggers when the range rank exceeds the 85th percentile, and ETF momentum turns positive within 5 days of the cross.

The Biotechnology ETF rallied 84% of the time after other signals

This model generated a signal 31 other times over the last 20 years. After the others, the IBB ETF future returns, win rates, and z-scores were solid across almost all time frames, especially the 2-month window. The model shows a positive return in 28 out of 31 instances at some point in the first three months. And one of the 28 winning signals was from an alert in February, which occurred in a challenging environment.

What the research tells us...

When the optimism index for the Biotechnology ETF (IBB) reverses from a pessimistic level, it signals that traders have become more optimistic about the future direction of biotechnology stocks. Using the Optix index to measure that change in sentiment, similar setups to what we're seeing now have preceded rising prices for the Biotechnology ETF (IBB), especially in the first 3 months.