Lat Friday on CNBC’s Options Action, we discussed the under-performance of Biotech stocks in the first half of 2016. Meg Tirrell highlighted the large cash balances of mega-cap biotechs, and the potential for a second half m&a binge, but questioned whether that is enough to spark a meaningful bid in the group that is down 33% from its 52 week highs (measured by the IBB, the iShares Nasdaq Biotech etf):
My co-panelist Carter Worth of Cornerstone Research thinks that Amgen (AMGN), also the largest component of the IBB, has shown very good relative strength to the IBB and could be poised to break out above the downtrend from its 52 week highs. For my purposes here I’d like to take a quick look at the trade set up in the IBB, especially considering its poor relative performance to the S&P 500 (SPX). It doesn’t take a chartered technical analyst to see what has emerged as a very well defined trading range with massive support at $240 and fairly staunch resistance around $290 (which also happens to be the etf’s 200 day moving average):
Taking a slightly longer view of the IBB, a strong case could be made that the etf is near a short term technical inflection point, being the pronounced downtrend from the all time highs made last summer. If rejected could easily re-test the prior lows near $240. On the flip side, a breakout above the downtrend could clearly put a re-test of the $290 resistance level, with massive technical resistance lying above at the long term uptrend at about $320:
No matter your directional view, options premiums look fairly reasonable, with 30 day at the money implied volatility at 25%, vs 30 day realized volatility (how much the etf is moving-white) at 32%:
We’ll be checking back in on IBB and some of its components. Whether that downtrend holds or fails may offer clues to how under-performers may act for the balance of 2016.