ETF Outlook: More Biotech Blunders Or A Biotech Bounce?

Stocks' September shenanigans continued last week as the S&P 500 lost more than one percent and although the Dow Jones Industrial Average notched a triple-digit gain last Friday, a problem is surfacing: Increasingly bearish action in the biotechnology space.

 

It is not a stretch to say that in the week ahead, this is an issue that traders of and investors in exchange traded funds will be heavily focusing on. That much is confirmed when noting the iShares Nasdaq Biotechnology ETF IBB, the largest biotech ETF, slumped 13 percent last week and will enter Monday at its lowest levels in a month. With last week's tumble, IBB now resides nearly 11 percent below its 200-day moving average.

 

As an equal-weight ETF, the SPDR S&P Biotech ETF XBI has heavier exposure to smaller biotechs than does the rival IBB. So it is not surprising that XBI was worse for the wear last week, sliding 15 percent.

 

Alas, readers of this space have been consistently illuminated as to how to profit from a biotech decline as the Direxion Daily S&P Biotech Bear 3X Shares LABD has been highlighted here multiple times over the past two months. LABD, the triple-leveraged answer to XBI, gained over 60 percent last week. 

 

Investors should be careful with thinking that broad market ETFs will provide insulation from further biotech retrenchment. Health care is the third-largest sector weight in the S&P 500, accounting for more than 15 percent of that index's weight. The PowerShares QQQ QQQ, the NASDAQ-100 tracking ETF, has a health care weight of 14.1 percent. Since it is the Nasdaq we're talking about in the case of QQQ, health care usually means biotech. That means more biotech declines muddle the near-term outlook for the Nasdaq and QQQ

 

Stepping away from biotech, there are more problems with the potential to confound investors, namely slack earnings. Cyclical sectors look particularly vulnerable.

 

“Earnings for the commodity-sensitive materials are expected to fall 13.8 percent, while industrials' earnings are seen down 3.6 percent,” according to Reuters

 

Last week, Dow component Caterpillar Inc. CAT, an industrial stock with heavy materials exposure, slid 9.6 percent. Caterpillar's slide has pushed the Industrial Select Sector SPDR XLI to a double-digit year-to-date loss while the Materials Select Sector SPDR XLB is threatening the Energy Select Sector SPDR XLE for the dubious honor of 2015's worst-performing sector SPDR.

 

XLB and XLE are down 16.1 percent and 19.5 percent, respectively, year-to-date. Speaking of XLE and rival energy ETFs, earnings season is going to be dismal. That sectors third-quarter earnings are expected to tumble by nearly 65 percent.

 

In the world of commodities, the ETFS Physical Palladium Shares PALL is worth a look in the week ahead because PALL, perhaps more than any other ETF, was the prime beneficiary of the Volkswagen controversy.

 

It is a simple equation. The Volkswagen controversy, in large part, involves diesel automobiles. Palladium is an important ingredient in the production of catalytic converters for automobiles produced with traditional gas engines. Hence, PALL is up 25 percent over the past month.

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