As investors know, the volatility that we've been having in this primary downtrend makes it very difficult to find solid investment opportunities.
It is true that in a bear market four out of five stocks will normally go down in price. In times like this it is often best to step back and look at some long-term powerful trends that may offer investors profitable opportunities over the long-term.
One area of the market that I continue to like is the biotech sector. As the Baby Boomers start to move into their golden years, the demand for new drugs for aging and health issues remain a key concern. That entices drug and biotech companies to pour money into leading research that could lead to a blockbuster that produces billions of dollars in revenue.
The new biotech bull market is also being driven by drug companies that have to constantly replenish reserves as older drugs come off a patent. That forces these large drug companies to search the market for new drugs, which many of the biotech companies have in the pipelines.
Many times if these companies fit into the large drug companies' business model they will buy the entire company. As the Baby Boomers continue to age, the search for new and alternative drugs will likely continue to accelerate this market in the long-term.
If you look at the chart the Dow Jones U.S. Biotechnology Index you can see it has been in a basing pattern over the past several years. The recent break out has left the index slightly extended, but any pullback near the top support line may be a buying opportunity in the sector.
Investors know that biotechnology companies can be very volatile and can make very large daily moves and their prices. When dealing with a highly volatile sector, I feel is best to diversify by using one of the exchange-traded portfolio funds. The key is to carefully watch what stocks the fund is holding and that the percentages and one holding does not get too large. Below are the holdings of the
PowerShares Dynamic Biotech Portfolio ETF
Technically, this fund is pulling back from a slightly extended run that it had from July to mid-August. You can also see that the volume has been declining as the price has pulled back, and that is a positive sign. The institutional money stream at the bottom the chart has also continued to stay in a solid uptrend during the correction.
I would like to see the price drop closer to or down in the green box that I've drawn on the chart to offer a better risk to reward scenario. However, if there is a spike higher in price from this point followed by a heavy increase in volume it may be a good time to take a position. A break below $18 would force me re-evaluate my position.
The next exchange fund is the
iShares Nasdaq Biotechnology Index Fund ETF
. This fund holds more of the larger well-known companies in the biotech sector. You can see from the holding summary that they do have some large positions in
. These large holdings would certainly affect the price of the fund if anyone of them made a dramatic move.
Technically, the fund is very close to the $84 support level and the 50-day moving average. The key here will be to see if it holds that level and then starts to move back up on increasing volume. If that happens, it may be a good area to start testing the waters. If we see a break below the $84 level there will be a good chance that will test the next major support area around $80. Another key is that the institutional money stream at the bottom of the chart remains above the yellow trend line that I have drawn.
Even though these funds are holding a basket of stocks they still can be very volatile and that means you should not overweight your portfolio with these positions and continue to use protective sell stops underneath major support areas in the case that the sector goes into a downtrend.
At time of publication, Manning did not own any of the stocks mentioned in this column, although holdings can change at any time.
Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback;
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