ETFdb.com is recommending a new long position for the month ahead. This trade is intended for investors who are looking to jump back into the markets after seeing the post-Brexit rotation. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.
The new long position is in the ALPS Medical Breakthroughs ETF (SBIO ). This recommendation aims to take advantage of bullish momentum returning to Wall Street following a short-lived pullback.
Position: Buy Health Care Select Sector SPDR Fund (SBIO ). Date: 8/1/2016. Price: $25.12 (as of 7/29 close).
This pick of the month is perhaps best described as a lagging growth recommendation; that is to say, while the biotech sector is historically regarded for its risk-on appeal, it has struggled to outperform the broad market since the last quarter of 2015. Nonetheless, we feel there are firm macro tailwinds in place and the recent underperformance may actually be an opportunity to scale into this former market leader.
Much to everyone’s’ surprise, there was a clear risk-on rotation after the shocking results of the Brexit. Growth names are back in vogue over value, low-volatility ones. But why? The re-introduction of global growth fears was interpreted as a sign that policymakers will keep their foot firmly pressed on the easing pedal more so than ever now. Brexit welcomed back the “low-rates = buy the dip” theme that many had counted as long and gone; and along with it has come a risk-on rotation among the equity sectors.
Biotech in particular appears to have found support following its fall from grace. While the overhanging election risk is still present for the industry, it may prove overblown in retrospect given the unchanged, secular tailwinds. They are: the intersection of rapid advances in technology and favorable demographic trends.
From a product perspective, SBIO has a unique methodology which captures growing mid and small-cap biotech stocks. By comparison the more popular vehicle in the space, IBB, is heavily concentrated in large cap names. SBIO has been a leader before when biotech turns bullish; for instance, since the February 11th lows of this year this ETF is up +16% vs. IBB +9% (as of 7/18/16).
Let’s move to the technical setup that the Medical Breakthroughs ETF presents at the moment.
From an intermediate-term perspective, SBIO has endured a prolonged pullback and is now showing signs of bottoming out having recently traded above its flatting 100-day moving average. This is not wildly bullish by any measure, but constructive price action nonetheless. From a longer-term perspective, it is fairer to say that SBIO is in a downtrend rather than an uptrend, and for that reason caution is warranted with this long position.
Given its steady rise since the February lows, this ETF offers an attractive entry setup. We recommend exiting this trade upon a daily close of around $21 a share depending on your risk tolerance.
The Bottom Line
We are recommending a long position in the biotech ETF for two reasons. From a fundamental perspective, this industry appears oversold given the unchanged tailwinds in place. From a technical perspective, SBIO offers an appealing entry point for those looking to scale back into growth-centric names. Buy on the dips, and remember to have an exit plan.
Follow me @SBojinov
Disclosure: No positions at time of writing.