Could the Post-Trump Sell-Off Be Just the Beginning For This Biotech ETF?

The iShares NASDAQ Biotechnology Index ETF (IBB) is taking a hit following a slam from President-elect Donald Trump

Jan 11, 2017 at 2:55 PM
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The past year has been rough on biotech stocks, with the "Biomedics Genetics" sector consistently falling at or near the bottom of our internal Sector Scorecard for months. According to Schaeffer's Senior Quantitative Analyst Rocky White, only about half of the 56 sector components we track are currently trading above their 80-day moving averages, and the average year-over-year return across these stocks is less than 10% -- lagging the broader market. In fact, the iShares NASDAQ Biotechnology Index ETF (IBB) is actually sitting on a 6.8% year-over-year loss -- but, like a large number of its components, still holds a great deal of upbeat sentiment.

The sector is in particular focus today, as this morning's press conference from President-elect Donald Trump has been moving the market. Shortly after the conference kicked off, IBB dropped sharply, last seen down 3.6% at $276.06. Specifically, Trump called the drug industry "disastrous," as U.S. companies are "leaving left and right." He added, "the other thing we have to do is create new bidding procedures for the drug industry, because they're getting away with murder."

Of course, even before today, IBB hadn't exactly been an outstanding performer, chopping back and forth between the $250 and $300 levels after falling hard from its 2015 highs. Now, the shares appear to be coiling into a triangle pattern:

IBB Daily Chart January 11 1

Chart courtesy of

It's not all bad news. IBB just notched its sixth straight days of gains, as well as five straight sessions above its upper Bollinger Band. Still, today's drop has the ETF set to snap both of these streaks, and there's no reason to believe a major breakout will be ahead. Schaeffer's Senior Options Strategist Tony Venosa, CMT, says he still sees "biotech in a major chop with a cloudy forecast," with potentially more pressure ahead. Senior Trading Analyst Bryan Sapp concurred, citing "lots of risk and uncertainty" within the sector.

IBB Daily Chart January 11 2

Despite these technical and fundamental problems, IBB remains surrounded by optimism. Short interest on the ETF fell by nearly 14% during the two most recent reporting periods, and is just off a nearly two-year low. Plus, call buying has picked up of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the ETF has a 10-week call/put volume ratio of 1.41 -- higher than 69% of comparable readings from the past year. Should sentiment sour, IBB may find itself sliding even further.

In any case, it's an attractive time for short-term traders to pick up premium on the iShares NASDAQ Biotechnology Index ETF (IBB). The ETF's Schaeffer's Volatility Index (SVI) of 21% ranks just 4 percentage points from an annual low, suggesting the options market is pricing in historically low volatility expectations at the moment. Plus, IBB holds a Schaeffer's Volatility Scorecard (SVS) of 78, meaning the ETF has tended to be more volatile than the options market has expected over the past 12 months.

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