Biotech Stocks Diverge from the Market

Ed Ponsi

It seems that every day, we hear of new innovations in the field of medicine. Just this week, the Food and Drug Administration provided emergency authorization for a convalescent plasma treatment for Covid-19. Also, major pharmaceutical firms are reportedly closing in on a vaccine, which could be available before year end. 

The biotech sector is the cutting edge of medicine. With all the recent medical news, you'd think biotech stocks would be hot. However, that sector has suddenly diverged from the overall market. 

On this chart, the iShares Nasdaq Biotechnology ETF, symbol IBB in blue, has outperformed the S&P 500, in green, for the year. However, the paths of these two investments appear to be diverging. Could it be that biotech stocks have already had their run?

IBBvsSP500
S&P 500 (green) vs. IBB (blue). Chart by TradeStation

Now look at IBB on its own. As markets traded at all-time highs on Monday, IBB reached a two-month low. The biotech ETF is forming a series of lower highs and lower lows, representing the start of a possible down trend. 

IBB
IBB chart by TradeStation

Since IBB represents the sector itself, it is essentially the average of the components within it. One of the those components is Regeneron, symbol REGN

REGN

Regeneron has had a great year, gaining 58%. However, the stock's 50 day moving average, shown in blue, has finally been broken, and is now acting as resistance. 

Although the stock hasn't yet broken down, its MACD indicator has diverged from the price and is in a down trend. With the biotech sector weakening, it might be time to take profit in this stock. 

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Ed Ponsi is the managing director of Barchetta Capital Management, and is the author of three books for publisher Wiley Finance. A dynamic public speaker, Ed has made appearances around the world, in such diverse locations as Singapore, Dubai, London, and New York. For more information about Ed and his work, click here.