further potential weakness in u s pharmaceutical and biotechnology stocks regardless who wins the u

The upcoming U.S. presidential election on 08 November 2016 has been a major talk of the town because it has been fraught with controversies and personal attacks on both the candidates’ character; Hillary Clinton’s alleged corruption via Clinton Foundation and the usage of personal email for her official duties when she was the Secretary of State that caused sensitive intelligence information to be leaked out and hacked. On the other hand, Donald Trump’s alleged lewd comments and behaviour towards women.

From a stock market perspective, it is cleared that the market does not like a Trump victory. Since last Friday, 28 October 2016 after the FBI made a “shock” announcement at the tail-end of the presidential campaign period that they had reopened a probe into Hilary Clinton’s e-mail case, major polls have now indicated that Hillary’s initial lead over Trump has narrowed and the benchmark U.S. S&P 500 had plummeted by 2% to hit a low of 2097 printed on 01 November 2016.

From its current all-time high of 2194 recorded on 15 August 2016, the S&P 500 has continued to wobble and it is down by 3.7% based on 01 November 2016 closing level of 2111.

Let’s us now take a closer look at the various key U.S. sectors yearly performances (exclude dividends) as represented by their respective exchange traded funds (ETFs) from the start of the on-going 7-year old primary bull market that occurred in March 2009  (see table below).

The Pharmaceutical & Biotechnology sector is the leader in the current primary bull market as its median yearly return is the highest at 30%. Interestingly in the recent years since 2012, the biotechnology and pharmaceutical stocks had attracted a lot of money inflows from retailers to institutional investors (both mutual and hedge funds) as players piled into this “positive momentum” feedback loop.

The Pharmaceutical/ Biotechnology play had become “overcrowded” on the long side which caused it to be very vulnerable to “shocks”. As seen from its current performance from January 2016 to October 2016, it is the worst performing sector which has recorded a whopping loss of 22.5%!

Back to the topic on the current U.S. presidential election, both Hilary Clinton and Donald Trump have pledged in their respective campaign on healthcare is to reduce the price of prescription drugs for consumers. Their aim through different methods is to restrict drug companies from excessive profiteering as exuberant soaring retail prices have been charged on drugs and critical lifesaving treatments like Mylan NV’s EpiPen. Therefore regardless who wins the U.S. presidential election, profit margins of pharmaceutical and biotechnology firms will be squeeze if the aforementioned pledges are made legal binding by Congress.

Going forward, the prospect is not going to be rosy for U.S. pharmaceutical and biotech stocks. Let’s us now take a deep dive into a highly liquid exchange traded fund, the iShares Nasdaq Biotechnology Index (IBB) that tracks the U.S. pharmaceutical and biotechnology sector from a technical analysis perspective on a longer-term multi-month horizon.

U.S. Sectors Performance Table

(click to enlarge)

Source: eSignal. Returns are calculated based on open price at the start of a period to close price at the end of a period. Start period for 2009 is based on 09 March 2009.

iShares Nasdaq Biotechnology Index (IBB)

(Click to enlarge chart)

Key elements

• The Pharmaceutical/Biotechnology sector ETF  (IBB) major uptrend from August 2011 low has been damaged through the price action breakdown of its respective ascending trendline (depicted in dotted pink) and the reintegration of former ascending channel’s upper boundary bullish breakout that that has turned into a pull-back support (depicted in dotted red).
• Since February 2016, the price action of IBB has started to evolve into medium-term bearish descending channel with its upper boundary now at 278.60.
• The lower boundary of the aforementioned descending channel stands at 187.00 which also coincide with other elements. Firstly, it is the long-term primary ascending trendline from November 2008 low (depicted in green). Secondly , it is also a Fibonacci cluster (61.8% retracement of the primary up move from November 2008 low to the July 2015 high of 400.79 and a 0.764 projection from July 2015 high). Therefore, the 187.00 level is a significant support as it confluences with multiple elements.
• Downside momentum of price action remains intact as indicated by the weekly RSI oscillator. It has now shown any bearish exhaustion signal and has not reached its extreme oversold level.
• The key major pivotal resistance stands at 312.30

Key levels (3 to 6 months)

Intermediate resistance: 278.60

Pivot (key resistance): 312.30

Supports: 240.00 & 187.00

Next resistance: 400.00

Conclusion

A major multi-month bearish down trend has already materialised in the U.S. Pharmaceutical/Biotechnology sector ETF (IBB) and technical elements are still advocating further weakness ahead.  The recent decline seen from 19 September 2016 high of 301.80 has been overstretched, thus a medium-term corrective rebound (dead cat bounce) towards the 278.60 intermediate resistance (descending channel resistance) may occurred at this juncture in the first step. As long as the major pivotal resistance at 312.30 is not surpassed, IBB is likely to undergo a further potential down move after the corrective rebound is completed to target 240.00 follow by 187.00 next.

However, a break above 312.30 (weekly close is required) may invalidate the preferred bearish scenario for a further squeeze up to retest its current all-time high region of 400.00.

Charts are from eSignal

Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this email, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs. All queries regarding the contents of this material are to be directed to City Index, a trading name of GAIN Capital Singapore Pte Ltd.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.