Healthcare & Biotech

The healthcare and biotech sectors were among the most important players during the beginning of the pandemic period.  But subsequently, after the brilliant performance in the first half of 2020, they started to weaken. Especially the Biotech sector, which has suffered a sharp fall since February this year.

Let’s first analyse the healthcare sector: we can observe in Figure 1, where the upper section shows the price level of the MSCI Healthcare world stock index and the lower section its relative strength compared to the MSCI WORLD stock index, that the latter had a strong surge precisely in the period of Covid's diffusion (1). It then followed a decline during the period when the first vaccines were created. But we can see that in recent months the sector has emerged from its weak state (2). We can observe in the detail box (3), that the indicator has exceeded its 200-day moving average (red line), and after a reversal, has continued its rise.

As for the Biotech sector, after the good performance in 2020 of +15.36%, it had a correction in 2021 with a Drawdown (distance between the maximum and minimum of the period) of about -15%. On this sector I still do not see signs of relative strength in the short term, but I can make a consideration on the historical trend that leads me to be very focused on the development of its price curve for the next period: in figure 2 we have the monthly trend of the Nasdaq Biotechnology Index since its creation in November 1993. We can observe that the index presents two peculiarities in its movement. The first is given by the fact that it has had only three bullish trends indicated by the green arrows (1994-1996, 1999-2000 and 2009-2015). For the rest of the time, apart from the strong correction after 2000 (red arrow), it has had a lateral trend (blue arrows), well contained within the Bollinger bands.

Interestingly, the July 2020 high (a), is higher than the high of the beginning of the sideways trend that began in 2015. This was followed by the subsequent high in February 2021 (b), which could signal the beginning of a potential fourth long-term bullish trend on the Biotech sector. But currently prices have formed a new high in August (c), which could be a top if not outperformed by the next monthly candles.

So, we need to evaluate in the coming periods which direction the prices will take. If we analyse the trend with the weekly data, in figure 3 we notice that this week's candle is right in the resistance zone already touched three weeks ago and in February (zone 1 in the upper right corner indicated by the three red arrows). The MACD is potentially bullish (2), but it forms a divergence that signals a slowdown in prices. Let's remember that this is a very volatile sector, and I would not be surprised that, in the presence of market corrections in general, it can retrace even, in extreme situations, at 50% of the Fibonacci level, which also represents the resistance zone of the previous sideways trend, now become support.

In summary, we can say that the Healthcare sector, from a relative strength point of view is well set up and could come back to be a protagonist for this second semester.

The Biotech sector presents an interesting situation and should be followed in the coming periods. It is important to remember that this is a high-beta growth sector, so any negative surprises on interest rates (which are typically negatively correlated with growth sectors) could affect future performance.

About the author

Mario Valentino Guffanti is a board member and Head of the Lugano Chapter. He is a financial advisor, technical analyst and researcher based in Milan, Italy. As an author of technical articles and lecturer as well as instructor in technical analysis courses in Switzerland, he is also dedicated to financial coaching through NLP techniques (neuro-linguistic programming).