Trading By the Numbers: Bargains in Biotech?

I know traders who won’t touch biotechnology stocks with a ten-foot pole.

The argument is that they are just too unpredictable. A surprise clinical trial result here, a government inquiry – or worse – there, and even the best laid plans of traders and investors alike can often go awry.

What’s interesting about this, though, is that the data doen’t think that biotechnology stocks – when it comes to pullbacks and snapback rallies – are anything special. When the data reveals, for example, that stocks making short term lows outperform short term highs, the data doesn’t exclude biotechnology stocks. When the data shows that using intraday weakness to buy stocks for short term trades is a way to both improve trading accuracy and potential per trade gains, there is no asterisk that says “biotechnology stocks not included.”

But for those for whom biotechnology stocks are a volatility headache just waiting to happen, biotechnology exchange-traded funds, that eliminate single stock risk by providing traders and active investors with exposure to a range of biotech stocks are an excellent alternative. And given recent pullbacks in the biotechnology ETF market, biotech ETFs may be a timely alternative, as well.

Heading into trading on Thursday, a number of biotech funds – from the AMEX Biotechnology Index Fund ETF (FBT) to the iShares Nasdaq Biotechnology Index Fund ETF (IBB) to the Biotechnology HOLDRS ETF (BBH) have all pulled back toward levels from which they have historically reversed and moved higher in the short term. Among these biotech funds, BBH is the only one trading in bull market territory, and having finished lower for three days in a row. That said, the edges in FBT and IBB are significant, putting both funds at the top of our list in terms of the largest edges in non-leveraged ETFs ahead of trading on Thursday.

The ETFs in today’s report were drawn from the data and research available through The Machine. To find out more, click here.

David Penn is Editor in Chief of