Home Trading ETFs LABU: A Compelling Biotech Trade (NYSEARCA:LABU)

LABU: A Compelling Biotech Trade (NYSEARCA:LABU)

by Vidya
Genetic research and Biotech science Concept. Human Biology technology on abstract digital background.


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It is not often that an investor gets to buy superb companies in a burgeoning growth sector at rock-bottom prices. The Direxion Biotechnology ETF (LABU) has taken a complete Pandemic roundtrip from the basement to the penthouse and back again. It is now such an opportunity.

(LABU)
Date Price Performance
March 18, 2020 $14.69
February 8, 2021 $183.21 +1,147%
January 25, 2022 (intraday) $18 -92%

This triple ETF (3x) from Direxion Funds tracks the S&P Biotechnology Select Industry Index.

There are approximately 192 companies in the SPDR index. Some of them have become household names over the last 2 years: AbbVie (ABBV), Amgen (AMGN), Biogen (BIIB), BioMarin (BMRN), Gilead (GILD) Inovio (INO), Moderna (MRNA), Novavax (NVAX), Regeneron (REGN).

The future of pharmaceuticals will certainly be based on the success of biotech to discover and develop compelling solutions to diseases – and any future pandemics – that might appear on the horizon.

My investment thesis is simple:

  1. There will be continued, ongoing investment ($$) in the biotech sector by governments and the private pharmaceutical industry. The countries of the world are never going back to the unprepared state of complete unreadiness that met the Corona Virus two years ago.
  2. The current sell-off is completely overdone. Technical analysis can pinpoint that.
  3. The dramatic sell-off in biotechnology names has provided a great entry point. Consider the symmetry in the chart below.

7 Year chart

LABU

StockCharts.com

What better time to buy a Biotech ETF than at the second-lowest point in its 7-year history? After each of the lows below, (LABU) advanced significantly within 4 weeks.

Date Price Performance
February 9, 2016 $18.83
March 7, 2016 $33.69 +79%
December 24, 2018 $23.85
January 16, 2019 $50.70 +112%
March 18, 2020 $14.69
April 20, 2020 $41.47 +182%
January 25, 2022 $18.00
? ? ?

Why such stellar short-term performance? (LABU) had been caught up in a market-wide sell-off (like now), and then rallied back within its normal range of prices.

As illustrated in my previous article, we are again at a point when ETFs can be paired with an underlying index at a superb buying point. The same principles apply here.

Currently, only 8.29% of all Nasdaq composite stocks (out of 2,500) are above their 20-day moving averages, a feat previously accomplished just three times in the last 5 years, and at the low dates for (LABU) listed above.

Stocks above 20 Day Moving Average

Nasdaq Composite

Barchart.com

Although there is severe volatility in this ETF, there have been 70 V-bottoms in the last 7 years, at timeframes when terrific dips like we’ve just seen (-92%) were followed shortly after by dramatic rallies.

2020

2020 Chart of highs and lows

StockCharts.com

2019

2019 Chart of highs and lows

StockCharts.com

2018

2018 Chart of highs and lows

StockCharts.com

2017

2017 Chart of highs and lows

StockCharts.com

2016

2016 Chart of highs and lows

StockCharts.com

2015

2015 Chart of highs and lows

StockCharts.com

I posted these annual charts above so that readers could see that LABU has been here many, many times before, and after each time recovered, with a high probability of a positive outcome.

For investors and traders who are able to withstand the volatility of this 3x ETF for a future reward, 7-year lows on (LABU) are an excellent entry point. It is precisely at times like these when investors must look at the mathematics and the probabilities of the situation, not the emotions of the herd hurtling off a cliff.

If past performance is any indication, I fully expect LABU to double from these lows in Spring, 2022.



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