Last Updated on May 2, 2019 by Chris Stang
Recently MS covered a play on the leveraged ETF known as LABD. After pulling 30%+ gains, the team has exited and begun eyeing a new opportunity in the same space.
M&A optimism and high prescription drug prices have been baked into the Biotech industry. Investors seem skeptical about which way to play this sector. In the last few weeks, the XBI erased most of the gains from the year. The political rhetoric of ‘Medicare for all’ from Bernie Sanders and Elizabeth Warren sure did not help.
If you’re bullish on earnings or growth prospects in the Biotech, LABU biotech bull ETF (inverse of LABD) could potentially be that extra paycheck you’ve been looking for. LABU is comprised of mid to large cap biotech/pharmaceutical companies. Investors/traders should be aware the fund is leveraged meaning it uses margin (i.e. borrowed money) exposing the ETF to greater risk and volatility.
One of the companies in the portfolio is Ionis Pharmaceuticals (IONS). As Chris Stang discussed in his article yesterday and forum post, IONS gets royalty payments from Biogen (BIIB). BIIB reported earnings yesterday and out of the $518 million in revenue Chris estimated about $62 million will go to IONS. At the end of the day the performance of LABU comes down to the performance of the companies within its portfolio. With lower corporate taxes companies across all sectors have an edge. Earnings this week should provide some confidence for investors as company’s like Bristol Myers Squibb, Biomarin, and Seattle Genetics report numbers today.
LABU yesterday (04/24/2019) had about a 40% short ratio and LABD (Biotech Bear 3x) had about 18% short ratio. Short ratio, is the number of shares sold short compared to total daily volume, not to be mistaken for short volume. Biogen reported earnings with an impressive quarter. The number of patients on therapy grew over 14%, revenue growth of about 10% from the previous quarter, and 42% growth over Q1 2018. If this is any inclination of the biotech sector as a whole, I’d imagine a potential shift into more defensive plays (i.e. Healthcare) as fears of recession gloom while the 3 months and 10-year treasury note spread and yield-curve flatten.
After reviewing the LABU chart, the Biotech Bull 3x looks as if it just completing its 5-wave corrective wave. We are looking for a bounce this week as long as there is not a broader market sell-off yanking healthcare down with it. High drug prices seem pretty baked into the market, possible sector shift back into healthcare while people let the DOW and S&P take a breather (#tripleTopped) or we get a melt-up. Either way, I see Biotech/Healthcare moving up.
New resistance to watch is noted in the chart at ~$59 – $60. If LABU does not break could see a further pullback to $34-37 range. I am looking for an early morning dip 4/25/2019 of about 1-1.5% where I’m looking to buy around the $48.40-$48.60 level for the run back up. See our previous trade on (Nasdaq: LABD) for more info on our previous money move!
Fear & Greed Index
After researching trends in broader markets the CNN fear and greed index indicates the S&P 500 and DOW are still in “healthy” conditions as the market makes its way to see higher highs. S&P 500 short volume is sitting at about 21% and has been dropping the past few trading sessions indicating that even shorts may think the S&P is going to see 3000.
Coming off our recent gains in LABD (Biotech bear 3x), MS is looking to buy the dip on LABU (Biotech Bull 3x) After the recent pullback in LABU is an attractive move to capitalize on the sector correction. Investors/traders considering the fund should be aware that LABU is a leveraged fund.
I am/we are long LABU.