Biotech Befuddlement In the Markets

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.

3-month BIS

5-year BIS

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.

IBB biotech fund 6 month chart

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.

The DJIA Falls

After a spectacular month of May, stocks started reaching maximum vertical trajectory. As a result of completely mixed signals from the Fed, it became apparent that a pullback might be entirely possible. Investors withdrew money from the market almost immediately. Also, after lower numbers of private jobs being created and offered, many people ceased all buying in anticipation of weak job report data set to be released tomorrow (friday, June 6).

dow jones industrial average falls for the second straight dayWhat does this all mean for investors who were finally starting to gain confidence in the market? It means that it will be necessary to educate investors in order to ensure that they are not scared into believing that we have the same issues that we did in 2009. We are mainly dealing with the side effects of a recovery. While stocks will do well long-term, they will likely fluctuate a great deal more between now and the period of full recovery. The Fed is looking to engage in a practice known as tapering. Tapering takes place when the Fed begins to cease bond buying, and monetary policy stimulus. Of course, it is going to be a long and arduous process. However, no one wants to have money in the market when the returns are not guaranteed.

That sounds absurd, however, it is necessary to remember that the gains were virtually guaranteed as long as the Fed continued to put money into the market. When the market fully has the capability to stand on its own two feet, then the Fed will cease buying bonds completely. This is something that troubles investors, but it really shouldn’t. The market will once again be able to sustain itself and not rely on outside funding. If you think of now as the right time to pull back, then you should be looking for long term gains. Allocate your investment model to allow you to benefit from a long term strategy and realize that the Dow will eventually bounce back.

New Heights Bring New Concerns

Stocks rallied on Friday, May 10 to bring about a new record high for the Dow Jones Industrial average. 15118.49 was the new mark. But does this mean that investors should plow their savings into this incredible rally? Probably not. There are many things that investors should know about this rally to gauge the limits of it’s potential. Many signs are pointing to a need to trim some of your realized gains in order to capture the value of this extended run, such as new information about algorithmic trading, Federal Reserve considerations, and Wall Street consensus.

History taught us a lesson, as we watched the most valuable portfolios in the world get roped in by the attractive mortgage-backed securities market in 2007. Just 6 years prior to that, the most valuable portfolios consisted of a less than 1% average investment in REIT’s and other mortgage-backed securities. By the time the crisis hit that number had swelled to over 3% of the portfolio on average, which is not an insignificant number considering the sheer volume. The crisis came at the heel of a magnificent bear run, wiping out incredible gains, and then some. Lesson #1: Greed in a bull market is like poison.

Quantitative easing has been a complete blessing for most investors as they have recorded astronomical gains. However, according to the Wall Street Journal, the Fed is now mapping out an exit strategy to see if the market can sustain itself. This means fewer governmental bond purchases to support stocks, and more. Unfortunately, due to the nature of the market, we only know bits and pieces as to where the Fed money has been applied. Therefore it is nearly impossible to predict which industries, sectors, and individual companies are most at risk of losing the outside support. This is not to say that you should sell off your portfolio and sit on the liquid capital. The market may be completely capable of sustaining itself, however, the increased volatility is sure to be a major factor in a non-stimulated market.

Stay tuned for part two

How I Use Housing Data to Trade Like a Pro

There are few indices which I have found are useful for trading parameters. Many investors have long touted the benefits of using the VXX as an indicator of consumer sentiment. However, the VXX is too general to use to pursue specific securities and has deceived me in the past. It is better served to be a source of caution and a way to adjust your strategies for bear periods.

ITB iShares New Home Construction ETF

1 year performance of ITB New Home Construction ETF

I began to pay attention to Exchange Traded Fund, ITB in 2009, when it an all-time low at 6.49. The ITB, is the new homes construction index and it reflects th

e long term-sentiment of market makers as well as investors. At first the recovery of the ETF was rocky, then after a peak in 2011 at $8.88 the fund h

as not looked back. ITB has tracked gains with the gains of a solid mutual fund. The ETF sits currently at approximately 24/share, a healthy gain. While ITB was a great investment opportunity in it’s own right I was not able to capitalize on this. Instead, however, I tracked the companies with the hig

hest market shares in new home building and bought into them.

I purchased shares of Home Depot in January of 2012 at $43.51 for an unrealized gain of just over 30/share. The growth curve of Home Depot and even other materials companies have tracked the ITB exponentially. The phenomenon is not unique to the market leaders, however. The smaller players such as Loews, Kingfisher, and others enjoyed immense growth just skimming the business that Home Depot could no longer handle due to sheer volume.

Why is this important to you? Well the housing, “boom” if you will is not over at all. As a matter of fact, home prices are at the highest they have been in 7 years. This is even leadin

g to a shortage of new homes and it is not allowing home builders to fulfill all of their orders. This could lead to increases in revenue and average order value. If you have housing stocks, hold them if you have the capability to. The materials that home builders are going to use will be top end. What is coming about as a result? Home builders are holding lotteries for potent

home depot stock charts

ial homeowners, to see who will win the right to buy the house.

I am certainly interested in gaining more positions in stocks surrounding this industry. There will be a lot of different ways to gain. Toll Brothers, Pulte Homes, and other home builders will be able to command a much higher price for their products. Provided other variables stay the same, the net operating income should rise for all of these players.

Algorithmic Trading: What’s Next

The recent Associated Press Twitter Account hack showed investors just how vulnerable the new age of trading is. First, various algorithms scan for key words to determine what the current trading sentiment is. When buyers seem pessimistic, or news is drastic, trades are executed accordingly. The problem with this is that it happens so quickly, investors do not really have an edge. The point of this is to automate the scan for signals which would require constant human vigilance, and access to hundreds of twitter feeds simultaneously. Obviously, that’s not possible.

Diagram_edit

The idea that Twitter is such a key indicator for investors is quite remarkable, but it should really come as no surprise. Long gone are the days in which investors merely scanned simple moving averages for key stock signals. The reality of trading today is that all investors have access to tools via online brokerages, or freeware. As a result, almost all key technical indicators are already priced into the stock. See a great play based on the MACD, or 60-day moving average? Though it may seem you see a future trend, because this information is already priced into the stock.

The idea is to garner more real-time information than the next investor, however, this is hard to do with the tools available. The only way to be sure that you are going to have information that other investors don’t have access to is when you turn to automation as a solution to your information needs. Algorithmic traders have become desired commodities because they are able to take advantage of proprietary formulas used not only to scan social media, but all publications in real time.trade proposals

However, this technology is new, and exceedingly expensive. It is usually only available to hedge fund owners. So how do you benefit from the use of this? One of the cheapest ways to reap the rewards of algorithmic trading is to follow unusual trade activity. This is only kept secret for so long, as unusual trade and option activity is public information. Follow the money and you will follow go along for the ride.

Consumer Sentiment and Uncertain Job Data Worry Investors

Monday’s opening bell rang, but with much less confidence than we have seen year-to-date. Wall Street analysts were warning of signs pointing to a sharp sell-off, which included a low point in retail sales, as well as the skewed data regarding jobless claims.

Consumer sentiment has typically been one of the driving forces of short-term changes. The Volatility Index is most commonly thought of as the fear index. A recent graph spike drove analysts to anticipate the bad news, and it arrived in the form of the Consumer Confidence Index. The regression line shows a steady decline, not only in Consumer Confidence, but even in GDP. This level is down over 15% below the average.

Consumer Confidence Index Dip

The Jobless claims dipped by a wide margin, which at first put many consumers and investors at ease. However, upon further investigation it became apparent that far fewer jobs were added than were initially anticipated. Also, after a bit more examination analysts found startling patterns within the data. The unemployed comes with a specific definition, and one of the criteria is that candidates are actively seeking employment. Investigators found that many of those who were seeking jobs simply gave up after a long and fruitless search. As a result they were removed from the unemployed pool, which distorted the results of the report even further. Once this became apparent investors responded with a sharp sell-off.

Newest Jobless Claims Report

Google Rising

Many of those who thought that the juggernaut could not grow any more have been completely flustered. There are a lot of reasons why this information and tech giant is taking steps in a completely new direction. Google’s new ambitious venture, Google Fiber may take over numerous cable companies’ strangle hold on the communications infrastructure. Although many investors saw this as a risky endeavor, it became apparent what Google could do with this infrastructure. Apart from breaking into the television segment, they would be able to offer speeds of up 100 times faster than ordinary broadband.

The cost of this was reflected in the initial pricing of the stock on Tuesday as it fell to a near 6-month low of 768 dollars. This was $8 off the pace of the average closing price. However, consumers and investors alike began to realize what it could mean and the stock took a 2 day combined run of almost $20 making Google seem like visionaries. There are a lot of ways that Google could leverage this for advertising, and their YouTube channel. This could allow Google to learn more about their customers offline, and gather an incredible amount of marketing data, and essentially diversify from information search to one of the biggest marketing companies in the world.

The gain of the stock will undoubtedly take some time. If you are thinking of getting into this security, you should consider doing a LEAP, or a long-term options call strategy. Those looking for quick gains will be disappointed. The high cost of entry means that it is only feasible for investors with a significant amount of free capital to spend. Of course, this is already priced into the options premiums which is why they are selling at such an inflated price. However, it is worth spending the money for the option. The current January 2014 810 call is selling for a total net credit of $5,060. This would give time for the infrastructure to be completed and would allow the stock to soar to an analyst estimated, $900 per share for a net debit of approximately $35-40 per share. The break-even price for the trade, minus commission and taxes, would be 860.60/share.