Both momentum and seasonality/cyclicality favor equity market leadership from the Biotechnology industry. The chart just below shows the historical weekly price path for the iShares NASDAQ Biotechnology Index ETF ($IBB) in the upper pane, and momentum for $IBB in the lower pane. Notice that medium-term momentum bottomed the week ended May 30, 2014, and appears slated to remain constructive into August.

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Per Equityclock.com, the S&P 500 Biotech industry is approaching a point where seasonal outperformance (versus both the broad market and the Health Care sector) typically commences. The second exhibit shows the average path of the S&P 500 Biotechnology Index versus the S&P 500 Index.

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More broadly, as is highlighted just below, I shared earlier my momentum-based belief that Health Care (along with the Information Technology and Consumer Discretionary sectors) boasts clear-cut, compelling medium-term prospects.

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A popular and oft-quoted research effort on the importance of asset allocation found that the asset allocation factor (versus market timing and security selection) explained roughly 94% of variability in portfolio returns. As such, one might intuitively ascribe a higher probability to the potential that Biotech (as well as other industries in the Health Care sector) will beat the market if the sector does.

And finally, I submit that earnings estimate revisions likewise support the notion that the run for Biotech has legs still. The final exhibit (below) illustrates the 90-day change in consensus 2014 earnings estimates for each of the top ten holdings in $IBB. Per data from Zacks.com, ninety days ago IBB’s top ten holdings were expected to contribute $3.07/share to $IBB’s total earnings per share for this year. That figure has risen to $3.51 today. Note: while there are 123 securities included in $IBB, the top 10 holdings make up roughly 60% of the total capitalization of the fund, so this admittedly small subset of names might be reasonably representative of the characteristics of the fund in aggregate.

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In summary, momentum and seasonality both point to a multi-month continuation of outperformance by Biotechnology. This outlook is corroborated by the medium-term momentum underpinning for the Health Care sector and, fundamentally, by the improved view of earnings per share for the Biotech industry.

Stay tuned!

 

 

 

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