Corrections take place at a macro level which most investors typically are more familiar with. However the need for diversification has never been more present, and the recent plunge in the biotech/pharma sector highlights this need most completely. This is why it is important to be familiar with the individual segments that the companies in your portfolio belong to. By doing so, you become a more vigilant and well-rounded investor, because you’re considering the macro level as well as micro level for risk management.
So what are a few of the reasons for the recent plunge? Are just a few major players having an off month that is dragging down the returns of the entire sector? At first many investors wanted to believe this, and looked at the ETF iShares Biotechnology Index (NASDAQ: IBB).
You can see below that the past three months show a rise to 275.40 on 2/24/2014. Since then the ETF has tumbled 18% to approximately.
However, a look at larger and smaller stocks alone show that this drop isn’t confined to several of the larger companies within the industry. It is a sector-wide dip, and frankly it is one that a chart savvy-investor wouldn’t ordinarily miss. The short to medium term investor has enjoyed over 100% growth since the middle of 2011. That growth margin is incredible over any time frame, let alone just a 3 year span.
Next, given the market corrections that have been shaking up the market in every sector, the onset of the biotech correction is almost a given; it just arrived a bit later. Let’s face it, 2013 was a monumental year for investors, but if you are holding a biotech, and have been for some time, consider locking in some of your profits before considering “buying the dip”.
Alternatively, BIS proshares, shorts a bucket of Biotech stocks, and is advertised as a “double short”. In other words, as biotech stocks dip by 1%, BIS proshares move inversely and gain 2%. This exact number hasn’t been verified by me, or any members of our team. However, the 3 month/5 year charts show the inverse relationship between the two, and can be found below. The peaks and valleys also show more exaggerated movements inversely to IBB which suggest that a 2X factor could, in fact, be present.
Though the ETF is nearly 20% off of the 52-week high, it is still over 40% over the 52-week low. The 20 period EMA indicates that it has indeed fallen too far, too fast.
There should be a buying opportunity in the near future, and look for MACD turnovers, Bollinger Band constrictions signalling consolidation before a possible trend reversal. Good luck and invest wisely.