The long-awaited and overdue market rotation into biotech began last week, as the mega-tech trillion-dollar valuations finally receded. With bios languishing for the majority of the year, it didn’t take much to move our group and cause a breakout of the SPDR S&P Biotech ETF (XBI), observes John McCamant, editor of The Medical Technology Stock Letter.
The index closed at 98 last week, its highest level since the beginning of March. As the economic data continues to support a slower-growth scenario, coupled with a mid-sized premium (+80%) biotech takeover, the XBI broke above the 88-92 trading range it was stuck in the past 2 1/2 months.
The majority of technicians suggest this move out of Big Tech to other sectors like ours will have some legs. For bios in particular, an early summer rally arrives well before the busy fall scientific/investor calendar kicks in after Labor Day.
The weekly XBI has had a wonderful run as well. In fact, the index touched the 200-week moving average of 99. A break above this would be a fantastic confirmation for the group and there is a lot of time before the summer run ends (just like Dead Forever at the SPHERE in Las Vegas!)
Hence, we believe that the rally can continue. The RSI for the weekly is 64, up nicely but not yet overbought at that level. And the weekly MACD is crossing positive for the first time in the right direction since the end of November – more good technical stuff.
The technical breakout has arrived for biotech and appears to have some lasting power. We are well above the moving average so we can see some pullback, but it just doesn’t feel that will be happening soon. Support is now at 94-95. Shorts beware!
For the first time since February, biotech investors can breathe deeply and even – as our hero, the late great Jerry Garcia sings – smile, smile, smile.
Recommended Action: Buy XBI.
