The biotech sector recently saw a sharp reversal after a failed post-election breakout attempt. While most areas of the market have risen to new heights since Donald Trump’s election victory on November 5, biotech ETFs such as the iShares Biotechnology ETF. NASDAQ: IBB and SPDR Biotech ETF New York Stock Exchange: XBI stopped short of new 52-week highs. The false breakout sparked significant selling, leaving investors wondering whether it represents a buying opportunity or a reason to exit the sector entirely. Let’s dive deeper into the developments.
Significant consolidation ahead of elections
Ahead of the election, the biotech sector seemed poised for a breakthrough. The IBB and XBI ETFs were consolidating near key moving averages and within months, presenting a tempting situation for investors. Given Trump’s pro-business stance and history of deregulation, many expected a positive reaction from the sector after the election. This forecast initially seemed accurate as XBI broke through the critical $100 resistance level, briefly holding above previous highs.
However, the situation quickly changed: the XBI index fell almost 11% in just one week and 8% in a month. The failed breakout turned previous resistance into significant overhead, dramatically changing the sector’s risk-reward profile. What once looked like an impulsive rally is now raising concerns about the sector’s short-term trajectory. For now, the technical rationale for a bullish breakout appears to be untenable, leading some investors to wonder whether the sector could soon offer a value opportunity instead.
SPDR S&P Biotech ETF (XBI) price chart for Sunday, November 24, 2024.
Biotech sector falls due to RFK Jr. appointment
President-elect Trump’s appointment of Robert F. Kennedy Jr. to lead the Department of Health and Human Services (HHS) was a major catalyst for the recent selloff. Kennedy, a controversial figure known for his vaccine skepticism, has made bold claims about overhauling the health care industry. His criticism of pharmaceutical companies for “deception, misinformation and disinformation” sent shockwaves through the biotech space.
Kennedy’s proposed policies, which include cleaning up the Food and Drug Administration (FDA), removing fluoride from public water supplies and reducing reliance on ultra-processed foods, have raised questions about the regulatory environment. Vaccine makers were hit particularly hard by the announcement, as Moderna NASDAQ: MRNA and Pfizer New York Stock Exchange: PFE having lost 7% and 4.5%, respectively, on the news. Moderna shares have fallen nearly 30% since the election, while Novavax NASDAQ: NVAXanother vaccine maker also faced sales pressure.
JP Morgan analysts noted that Kennedy’s oversight of agencies that make up HHS, including the FDA, CDC, NIH and Medicare/Medicaid, introduces significant uncertainty into the sector. While the long-term impact remains unclear, the short-term reaction reflects increased investor caution.
iShares Biotechnology ETF (IBB) price chart for Sunday, November 24, 2024.
Bottom line
The landscape in the biotech sector has changed dramatically in just a few weeks. Once on the cusp of a months-long breakthrough, the sector now faces growing uncertainty and technical weakness. Popular ETFs such as XBI and IBB are far from their recent highs, with many top holdings, including Pfizer, trading at or near 52-week lows. The Pfizer case highlights the potential benefits arising from a downturn in the sector. With a forward P/E of 8.34 and a dividend yield of 6.78%, the stock may be worth considering for investors willing to accept the risks associated with Kennedy’s policies.
While it’s too early to gauge the full impact of Kennedy’s appointment on the biotech industry, one thing is clear: the bullish tech sentiment has evaporated, leaving the sector in a precarious position. Investors should tread carefully, focusing on potential value plays while being mindful of the risks. For now, a failed breakout in the sector signals a pause rather than a green light for broad buying.
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