It is not often that an investor gets to buy superb companies at rock-bottom prices, and in a burgeoning growth sector too. The Direxion Biotechnology ETF (LABU) is now such an opportunity. It has taken a complete Pandemic roundtrip from the basement to the penthouse and back again.
March 18, 2020
February 8, 2021
January 25, 2022 (intraday)
(LABU) is a triple ETF (3x) from Direxion Funds which tracks the S&P Biotechnology Select Industry Index.
There are approximately 192 companies in the SPDR index. Some of them have become household names over the last 2 years: AbbVie (ABBV), Amgen (AMGN), Biogen (BIIB), BioMarin (BMRN), Gilead (GILD) Inovio (INO), Moderna (MRNA), Novavax (NVAX), Regeneron (REGN).
The future of pharmaceuticals will certainly be based on the success of biotechnology to discover and develop compelling solutions to new diseases – and for any future pandemics that might appear on the horizon.
My investment thesis is simple:
There will be continued, ongoing investment ($$) in the biotech sector by governments in the years to come, and by the private pharmaceutical industry. The International community is never going back to the unprepared state of unreadiness that met the Corona Virus two years ago.
The current sell-off in biotech is completely overdone. Technical analysis will illustrate this.
The dramatic sell-off in the biotechnology sector has provided a great entry point. Consider the symmetry in the chart below.
What better time to buy a Biotech ETF than at the second-lowest point in its 7-year history? After each of the lows below, (LABU) advanced significantly within 4 weeks.
February 9, 2016
March 7, 2016
December 24, 2018
January 16, 2019
March 18, 2020
April 20, 2020
January 25, 2022
Why such stellar short-term performance? (LABU) had been caught up in a market-wide sell-off, and then rallied back within its normal range of prices when the market recovered.
As illustrated in my previous article, we are again at that point when ETFs can be paired with an underlying index at a superb buying point. The same principles apply here.
Currently, only 8.29% of all Nasdaq composite stocks (out of 2,500) are above their 20-day moving averages, a feat previously accomplished just three times in the last 5 years, and at the low dates for (LABU) listed in the previous chart (above).
Although there is severe volatility in this ETF, there have been 70 V-bottoms in the last 7 years, at timeframes when terrific dips like we’ve just seen (-92%) were followed shortly after by dramatic rallies.
I posted these annual charts above so that readers could see that LABU has been here many, many times before, and after each time recovered, so there is a high probability of a positive outcome with this trade.
For investors and traders who are able to withstand the volatility of this 3x ETF for a future reward, 7-year lows on (LABU) are an excellent entry point. It is precisely at times like these when investors must look at the mathematics and the probabilities of the situation, not the emotions of the herd hurtling off a cliff.
If past performance is any indication, I fully expect LABU to double from these lows in Spring, 2022.