Although the equities market often embodies chaos and capricious non-linearity, few sectors witness as much kinetic wildness like biotechnology. At its core, biotech represents an innovative push toward addressing the human condition — which is often found to be shockingly frail. However, the initiative is capital intensive. Worse yet, the trajectory is driven by probability rather than linear growth.
In other words, years of research and billions in investments can hinge on a single clinical readout or regulatory decision. As such, the outcomes expressed in the market are often extreme in either direction. Subsequently, the biotech sector isn’t for the squeamish. Still, the inherent asymmetry is what compels bullish speculators — and is also what makes the environment so dangerous.
Indeed, the technical performance of the S&P Biotechnology Select Industry Index tells the tale perfectly. Since the start of the year, the benchmark has gained more than 35%. That’s much better than the S&P 500, which has moved up less than 16% during the same frame.
However, from the start of the year to mid-April, the biotech index lost about 15%. In contrast, the S&P 500 dipped just a bit more than 8%. No one questions the reality that the alignment of scientific momentum and funding conditions can spark explosive upside. Unfortunately, the opposite is also true — trial risks and capital contractions can lead to swift, unforgiving volatility.
Looking at the macro picture, biotech continues to sit at the intersection of multiple crosscurrents. On one hand, demographic realities and adjacent factors — such as aging populations, unmet medical needs and advances in genomics and personalized medicine — provide a long and powerful tailwind. Further, innovation remains robust, with novel platforms such as gene editing reshaping the future of medicine.
On the other hand, the sector faces persistent headwinds. Along with elevated development costs, biotech enterprises face an increasingly complex regulatory environment. Further, shifting reimbursement dynamics inject ongoing uncertainty into valuations. Plus, it should be noted that biotechs are particularly sensitive to capital market conditions, with many entities relying on external financing to sustain long-term development timelines before reaching profitability.
The Direxion ETFs: With credible arguments on both sides of the debate, directional conviction may eventually pivot away from the underlying fundamentals and toward individual conviction. To that end, financial services provider Direxion recognizes that reasonable market participants can arrive at sharply different conclusions. To meet this diverse need, it offers two countervailing exchange-traded funds.
First, the Direxion Daily S&P Biotech Bull 3X Shares (NYSE:LABU) seeks daily investment results, before fees and expenses, of 300% of the performance of the aforementioned biotech index. Second, the Direxion Daily S&P Biotech Bear 3X Shares (NYSE:LABD) targets 300% of the inverse of said index’s daily performance.
For many retail investors, a central appeal of these Direxion ETFs is accessibility. Expressing leveraged or bearish exposure through options or short-selling can introduce operational complexity, margin considerations and execution risk. By contrast, LABU and LABD allow traders to gain amplified directional exposure through a single, exchange-traded instrument, purchased and sold much like any other listed security.
That convenience, however, comes with important caveats. Leveraged and inverse ETFs are designed to achieve their stated objectives on a daily basis. Holding these instruments for periods longer than one trading session can expose investors to compounding effects that may cause performance to deviate significantly from expectations tied to the underlying index’s cumulative move.
Finally, it’s worth mentioning the obvious point: leverage magnifies both gains and losses. This is yet another reason why Direxion ETFs are designed for short-term exposure.
The LABU ETF: Since the start of the year, the LABU ETF gained 78%, making it one of the strongest-performing assets using leverage.
- Notably, the price action is currently well above the 50- and 200-day moving averages, which are likely the most commonly watched technical gauges of market strength.
- One noticeable concern for the bulls is fading volume since the late spring/early summer season. Ordinarily, volume should confirm rising price, not contradict it.
The LABD ETF: One of the worst-performing leveraged funds, the LABD ETF has lost more than 70% of value since the beginning of January.
- Not only has the LABD price action fallen conspicuously below the 50 and 200 DMAs, it’s also trending underneath the 20-day exponential MA.
- What’s interesting is the volume levels for LABD are rising. Some of this increase is tied to accumulative volume, potentially indicating a brewing sentiment shift.
Featured image from Shutterstock
This post contains sponsored content. This content is for informational purposes only and is not intended to be investing advice.
