Rolling Her Over, Again and Again (XBI)
Our third wife, Anklysor, hailed from the South Sea paradise of Tonga. She was a sweet soul, educated at the Nauru Military Academy and possessed of all the charm and dignity that such an institution can confer.
She was talented in other respects, too, but we can’t say that formal logic was one of them. Sure, she spoke English like a trucker and could sing like old Kate Smith, but moving from point A to point B in more or less a straight line was a daily challenge for my little Ankle.
We’ll leave aside for now her penchant for gardening and the fact that she was third in line for the throne of the ancient Tupou monarchy, though there’s much there to be discussed another time.
For now, we’ll focus on the rationality issue.
Oh, my, little queen…
The point is this – there’s a certain mode of operation that exists on Wall Street that has absolutely no validity whatsoever from an investment perspective, but it has obtained for so long that no one really questions it anymore.
It’s called ‘sector rotation’, and it’s a term that once had some meaning, but over the last two decades it has come to signify something completely irrational.
What Once Was
Sector rotation, as originally conceived, was tied to the business cycle, and the different sectors that traditionally profit during the evolving phases of a normal, capitalist boom-bust sequence.
Cyclicals and transports, for instance, normally thrive at the end of a recession, when new orders are just starting to build. Then, in the early stages of the recovery, industrials and basic materials start to move, as consumers start spending and production is ratcheted up. Other groups assume leadership as the cycle peaks and turns again lower, and the market generally responds to this rotation by buying into the latest group at the helm.
Have a look –
Today, perhaps because the normal boom-bust cycle has been replaced by an interventionist central bank that aims to ‘smooth’ the vicissitudes of business life, sector rotation has come to mean something different altogether.
Today, Wall Street may bid up, for example, the juiciest tech stocks, ever higher and higher, until they figure they can’t legitimately do it any more without risking a panic selling event, and then they turn to a new group. They ‘rotate’ their buying into a sector that was likely neglected during the hype of the prior, tech-buying spree.
At that point, the techs are left to drift, and healthcare stocks, for example, might assume the spotlight, becoming the flavor du jour until their juice is completely squeezed, and then we rotate into a new precinct.
Sector rotation today is a farce – a relay race – that Wall Street employs for no other reason than to goose profits, strengthen and elongate bull markets, and keep ordinary Main Street Jacks chasing equities in the dark.
It’s not honest.
But if we’re going to play the game, we have to be aware of it.
A look at the chart below demonstrates the latest beneficiary of the so-called ‘rotation’ trade.
It’s the biotechs, represented here by the SPDR S&P Biotech ETF (NYSE:XBI), a group that has been sitting dormant for the better part of two years and just came to life about five trading sessions ago.
A look at the pop through resistance at $73 (red line) gives one the chills. In just over a week, the stock leaped by nearly 20%. It now sits at $81 and appears to have run out of gas. An overbought RSI reading (in green) is likely a precursor to a test of former resistance (now support) at $73.
That doesn’t mean the biotech run is over. Indeed, policy positions out of Washington vis-à-vis the sector (and healthcare stocks, in general) appear to be softening, and implementation of any new laws detrimental to the industry could also be a long way off.
That means any near-term weakness will be exactly that – near-term. After such a long, sideways meander, we’re now looking at a breakout that should carry in much the same manner as the sexy techs have for the last eight months.
AND REMEMBER – Wall Street’s bigwigs will be buying the latest group now, letting the hype machine roll, giving it gas via their so-called ‘investment research’, and then liquidating their holdings to Vern and Mabel Gillespie from Peoria once it nears the top.
Your job is to ride the sector higher along with the smart money – but just part of the way, and with leverage – and jump well before you’re caught thumbing a ride to Peoria.
And now to our trade for the week!
Anklysor would be right proud of us for catching the biotech wave we intend to ride for the next short while. Lord rest her soul, she was a proficient swimmer and surfer, too. She passed into the next world for want of a Moa Bird, a Polynesian fowl whose liver had healing properties similar to those of penicillin.
South Sea Biotech!
Our trade today is based upon that same SPDR S&P Biotech ETF (NYSE:XBI) whose chart we featured above.
We want to accomplish several things with this bet, the first, profiting from the expected pullback to resistance we foresee occurring in the next three to six weeks.
Second, is the longer term goal of profiting from the biotech breakout in general.
The trade, therefore, is two pronged. And it looks like this –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew