Biotech revolution

Entering in the winter season has led to potential changes within the equity sector. The series of announcements made since the beginning of November on the effectiveness of the new vaccines against COVID-19, inaugurated by the pharmaceutical companies Pfizer and BioNtech, has led the stock market to anticipate the trend of a return to normality, focusing on issues more related to the physical economy than the digital economy. By now we are talking about sectorial stock rotation towards those sectors that have been strongly sold in the first part of the year, and which are at a discount compared to the most renowned sectors of the digital economy, which have achieved brilliant performances, first of all the technological sector. Equity themes represented by the industrial, banking and energy sectors have brought help to the European stock markets, which are more overweight on these topics than the American ones.

It is a movement born very quickly, which needs confirmation to be considered as a real beginning of sectorial rotation, and as a potential transition from growth style to value style.

Within these issues, I would like to focus on a sub-sector that I have been following for several months and that is related to the technology sector. This is the sub-sector of biotechnology, whose most representative index is undoubtedly the Nasdaq Biotech. In this index, there are just over 200 companies working on different solutions that do not only have to do with COVID-19, but that could revolutionize the world of medicine thanks to new discoveries of treatments using genetics as an alternative to chemistry used in the traditional pharmaceutical industry. We must remember that the new technologies in evidence in recent years, such as artificial intelligence (AI) and the use of Big Data, are providing the biotechnology sector with resources that are accelerating innovation times. A recent study by the McKinsey Global Institute appeared in May this year and entitled "The Bio Revolution - Innovations transforming economies, societies, and our lives", estimates a direct annual economic impact from biological applications between 0.6 to 1.5 trillion dollars by 2030.

In figure 1 we have the monthly trend of the Nasdaq Biotechnology Index since its creation in November 1993. We can observe that this index has two peculiarities in its movement. The first is that it had only three bullish trends (1994-1996, 1999-2000 and 2009-2015). For the rest of the time, apart from the strong correction after 2000, it had a sideways trend well contained within the Bollinger bands, and therefore profitable from a tactical point of view since the excursion travels with differences between lower and upper band of 35%/40%. If this maintains a lateral movement for a sufficiently long period, every time the price touches the lower band, we have an opportunity to purchase. Obviously, the matter is very reductive and must be supported also from other evidence: the risk in fact is given by a price that does not reverse the path when it arrives in the range of the lower band, but continues in its fall. This involves a closing of the position as soon as possible to contain the loss. But looking at the trend of a financial activity on a monthly chart and studying its behaviour, when you realize that there is a certain cyclicality you can build interesting investment assumptions. Try counting how many times in the chart, during the sideways periods indicated by the three blue arrows, there have been buying occasions on the period lows.

We also note that the candle formed in July 2020 (a), and the one in formation in the current month (b), have exceeded the maximum formed in 2015, walking on the upper Bollinger band. This situation indicates a potential strengthening of the trend also supported by the positive slope of the 12-month moving average (red line) and the MACD (1). The most accurate ones will have noticed that the last period of sideways (2016-2020), is characterized by higher lows, but I would like to point out that also the two previous periods (1996-1999 and 2004-2009) had a similar behaviour, which however saw, before starting the rise, a low much lower than the previous ones. In this case we have a new high, with a positive slope moving average and prices starting to walk on the upper Bollinger band, which indicate a potential greater strength of the trend.

An interesting information, which we can get from the historical monthly chart comparing the relative strength between the Nasdaq Biotech index and the Nasdaq 100 index, is the negative divergence between the ratio and its MACD, which indicates a gradual but continuous increase in strength in favour of the Nasdaq Biotech.

To be verified therefore in the next period, both the trend of weekly and monthly Nasdaq Biotech closings, and its relative strength against the Nasdaq 100, to have confirmations of the "Bio Revolution" also in the stock prices of biotech companies.

About the author

Mario Valentino Guffanti is a board member and Head of the Lugano Chapter. He is a financial advisor, technical analyst and researcher based in Milan, Italy. As an author of technical articles and lecturer as well as instructor in technical analysis courses in Switzerland, he is also dedicated to financial coaching through NLP techniques (neuro-linguistic programming).