Biotechs have grabbed the leadership baton and are positioned to outperform the stock market indexes.
In the June 22 Institutional View, I reported to my clients that the Nasdaq Biotech IndexNBI +0.50% generated a Buy signal, as did the iShares BiotechnologyIBB +0.67% exchange-traded fund (ticker: IBB).
The sector is positioned well to outperform for a variety of fundamental reasons. Biotechs—along with many other areas of healthcare—are largely recession-resistant. With an almost 40% decline in the sector from last year’s high, we are likely to see increased takeover activity. Witness Merck MRK –0.25% ’s (MRK) announcement that it is seeking to complete a takeover of the cancer biotech SeagenSGEN –0.28% (SGEN) for more than $200 a share.
The chart above shows the Nasdaq Biotech’s performance versus the Value Line Arithmetic Index. Because the biotech group includes small-caps and large-caps, I compare it to an equal-weighted index like the Value Line index. That’s because the largest stock by market cap in the Value Line Index is weighted the same as the smallest stock in the Index.
As you can see, the Biotech Index’s relative strength hurdled a two-year downtrend versus the Value Line index. Notice, too, that momentum has broken out. This illustrates that after a long period of underperformance, the biotechs have started to lead the market.
Further evidence of the group’s strength is that volume flows have rocketed to new all-time highs (see above chart)—even as the Index is well below its 5500 price high from last year. This is evidence of strong buying pressure. I expect that biotechs are positioned to outperform the market for the balance of 2022.
