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.
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.
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.
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.
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.