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The biotech sector was flying high for the first half of the year, but then the market turned in July and it is now trying to find its footing. The SPDR S&P Biotech ETF (NYSEArca: XBI) is just one of several ETFs that represent the biotech sector. It is one of the most heavily traded of the lot, so I like to use it as a barometer for the sector as a whole.
What we see when we look at the charts of the XBI is that the fund gained over 45% from the beginning of the year through mid-July, but from mid-July through late September the fund dropped in value by a third. From the bottom in September through last November it gained just shy of 21% before seeing another round of selling and now a recent round of buying. So where does it go from here?
A Positive Signal
Yes, the XBI has seen a volatile ride in 2015, but it looks like it is ready to head higher at this point. The daily chart shows that the slow stochastic readings have recently reversed course and had a bullish crossover and that occurred as the fund was moving back above its 50-day moving average.
The fund has been dancing around the moving average over the last few months after the trend line halted a rally in mid-September. Seeing the XBI remain above the 50-day would be a good sign going forward.
The weekly chart for the XBI shows a trend line that connects the lows over the last two years and how the fund came close to the trend line earlier this week before bouncing higher. This trend line is just above the 104-week moving average and the fund danced around that trend line back at the end of 2011.
The fund jumped over 50% from November 2011 through September 2012 and by July 2013 the XBI had doubled. It would go on to triple by December 2014 and more than quadrupled by this past summer.
Looking at the sentiment of the top 10 holdings in the XBI, the bearishness has increased in recent months and the average short interest ratio for the group is 8.267. All but one of the 10 have a short interest ratio of at least 5.0.
Another Bullish Run
Given the technical picture for the XBI and the increase in bearish sentiment toward the sector, I look for the fund to make another bullish run over the coming year. Given the nature of the sector and how volatile it can be, those with a low risk tolerance should avoid it.
I look for the sector to outperform during 2016 and a return of 30% to 40% would be reasonable. As for a stop-loss point, I would use a weekly close below the either the trend line or the moving average to cut losses.
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