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For Now, Traders Endorse Biotech Rally

Among leveraged and inverse biotechnology exchange-traded funds, the Direxion Daily S&P Biotech Bull 3X Shares (NYSE: LABU) and the Direxion Daily S&P Biotech Bear 3X Shares (NYSE: LABD) are the dominant names. The fund flow data for these products can potentially prove instructive regarding traders' near-term sentiment on the biotechnology space.

LABU looks to deliver triple the daily returns of the S&P Biotechnology Select Industry Index while the bearish LABD seeks to deliver triple the daily inverse returns of that benchmark. That index is equally weighted and leans toward mid- and small-cap biotech stocks. While new drug approvals are always a potential catalyst for biotech stocks and ETFs, increased mergers and acquisitions activity could put LABU in play this year.

“This isn’t exactly surprising considering how many biotech companies are flush with cash. 2017 saw $9 billion in venture money invested into biotechs, a 60 percent increase over 2016,” said Direxion in a recent note. “Over $2.8 billion in venture capital was invested in the first two months of 2018. On top of that, the recent tax reform only further deepened these companies’ cash reserves.”

What Traders Are Saying

In recent days, volume has been benign in both LABU and LABD, but over the past month, the bullish LABU has a decided advantage over its bearish counterpart when it comes to attracting money from traders.

Over the past 30 days, traders have been pouring an average of almost $1.5 million per day into LABU while the bearish LABD is suffering daily outflows averaging of nearly $375,000, according to Direxion data.

“So, clearly, Biotech is doing just fine from drug approval and M&A standpoints. But it’s understandable why some investors would be hesitant to jump back into biotechs,” said Direxion.

Lingering Concerns

The aforementioned data confirm that short-term traders are clearly favoring the bullish LABU over the bearish LABD, but that sentiment can rapidly change and there could be reasons to reevaluate LABD in the near future.

“For the bearish among us, there are several potential catalysts that could lead to a reversal in Biotech: mainly, the IPO window closing (preventing the sector from raising much-needed capital); a frothy VC market that could lead to out-of-whack valuations; or most importantly, that the drugs simply don’t work,” according to Direxion.

Top holdings in the funds are Array Biopharma Inc (NASDAQ: ARRY) (1.71 percent), Immunomedics, Inc. (NASDAQ: IMMU) (1.71 percent), Exelixis, Inc. (NASDAQ: EXEL) (1.68 percent) and Clovis Oncology Inc (NASDAQ: CLVS) (1.64 percent).

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