Will Biotech ETFs Continue to Soar?

09/02/2014 7:00 am EST

Focus: HEALTHCARE

After the four major biotech ETFs had a big week, questions about profit-taking and risk aversion lie ahead, notes John Burke of Wall Street Sector Selector.

The four major biotech ETFs made impressive gains last week, after enormous advances on Monday and Tuesday brought some profit-taking on Wednesday and Thursday. Trading volume was thin throughout the pre-holiday week, making it easier for stock prices to jump high. Friday’s session brought another round of strong advances for the sector as bullish, inverse head-and-shoulders chart patterns attracted buyers on the last trading day of the month. The four biotech ETFs advanced by an average of 4.82% during the five-day period.

At this point, the question arises as to whether geopolitical events will reinforce an atmosphere of risk aversion, once markets return to normal trading volume. Last spring’s “risk-off” phase was devastating to the biotech sector. On the other hand, ongoing concern about the threat of the Ebola virus could work to the advantage of biotech. Sunday brought a rash of reports concerning a suspected case of Ebola, in which a man returned to Stockholm after visiting a “high risk” country. Very few news media outlets appeared interested in reporting that treating doctors found no signs of the Ebola virus in the man’s system.

The latest report from the World Health Organization indicated that in the last 21 days (prior to August 29) 1,355 new Ebola cases brought the total to 3,052 and 101 deaths during that three-week period brought the death toll to 1,546. Healthcare workers have been particularly hard-hit by the disease.

On August 14, the Financial Industry Regulatory Authority (FINRA) issued a press release warning investors about viral disease stock scams, such as “pump and dump” schemes, when bogus articles are planted on websites to spark excitement in a worthless stock. One of the admonitions contained in the FINRA press release is useful for investors when considering whether to buy any biotech stock:

Don’t fall for name dropping. Citing a relationship with a government agency, prominent company or academic institution may be a ploy to create legitimacy for a company that does not deserve it. Be skeptical about these claims and try to confirm their authenticity. Also be wary if a company claims that it has received a “seal of approval” or similar distinction for its products. In some cases, companies pay an annual fee for these accolades or to remain on an organization’s “recommended products” list.

The last word: After the four major biotech ETFs advanced by an average of 4.82% last week, investors should be mindful of the possibility that geopolitical events could spark a mood of risk-aversion on Wall Street. Because last spring’s “risk-off” season hit the biotech sector particularly hard, investors might want to take some steps to protect those gains.

By John Burke of Wall Street Sector Selector

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