How to Spot Where Breakouts Will Happen
Months ago, the drug industry was in a state of panic.
Between tweets from Hillary Clinton, and comments from Donald Trump’s that the industry was “getting away with murder” investors became unnerved for quite some time. There were even fears that pricing controls could wreak havoc on the sector, too.
However, most of that, we believe, was priced in on a massive pullback.
Plus, the pullback never removed the potency of the sector. Fundamentals were still as strong as ever. We had 80 million baby boomers retiring, newly insured Americans, new innovation, heavy demand, and wild amounts of mergers and acquisitions.
Those are substantial catalysts that make the sector recession-proof, too.
Even better, last year’s drop in biotech stocks led to significant reductions in companies’ valuations. Even as many were generating healthy earnings with strong pipelines, many still became exceptionally favorable from a valuation perspective.
In short, it was only a matter of time before biotech popped again on fundamentals.
Granted, ETFs, like the iShares NASDAQ Biotech ETF (IBB) went virtually nowhere for months. But as long as the ETF kept consolidating in that channel between $240 and $295, it was still a good bet. The pent-up demand was still there. We couldn’t ignore that.
All we had to do was buy and hold… and wait.
By June 2017, we could see just how powerful the pent-up demand was for the sector.
At the time, according to Bloomberg:
An executive order the Trump administration is preparing will contain industry-friendly policies instead of more aggressive proposals. The policies being considered include efforts to promote cooperative arrangements between drugmakers and insurers, speeding approval of new treatments, and finding ways to make other countries pay more for drugs. “It just sounds more and more likely that the focus is going to be on removing barriers to entry rather than a direct attack on pricing,” said Brian Skorney, an analyst at Robert W. Baird & Co. “That’s a pretty industry-friendly scenario if it does end up occurring."
Once that news hit, the IBB for example skyrocketed from $290 to $323 in days.
Investors just needed a new reason to buy the sector – which this news provided. However, by positioning ourselves early in a sector others were foolishly ignoring, we were there first.
Opportunities just like this one can be found everywhere.
Look at the semiconductor industry for example with the Van Eck Vectors Semiconductor ETF (SMH). For most of 2015, it went virtually nowhere. But on the heels of strong fundamentals, including excitement over the Internet of Things (IoT), virtual and augmented reality, it wasn’t long before the sector exploded. In fact, the ETF would go on to double in a year.
All we’re really doing is hunting down the hottest ideas that others may be foolishly ignoring, waiting for the negativity to be fully priced in, and buying and holding. We’re finding ideas with fundamental and technical punch, and just waiting.
While we're on the subject of breakouts, an interesting "X-Pattern" often signals a major breakout to the upside with high-quality stocks. A similar "X-Pattern" also identifies the end of the trend. Learn how to capture large moves before they happen by reading this report.