ETF Plays: Biotech Running Slightly Stronger; Careful With Energy (IBB, XLE, PJP, SPY, IYR, GLD, EWM, EWJ)

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June 26, 2011 10:24pm NASDAQ:IBB NYSE:EWJ

Recommended funds:  Biotech (NYSE:IBB) remains our primary recommendation this week. With the +1.68% rise and slightly higher volume over the past week, the expected return is definitely positive and slightly higher. IBB’s risk has decreased over the past week

 and is now moderate. IBB has stayed above the rising 100 day EMA very nicely and is now close to possibly moving above the 20 day EMA.

  • According to Ron Vinokoor (Jun 24), the seasonally bullish period for IBB has just started.
  • @CPtte (Jun 20): $IBB all the way back to early April support lines 101.50ish Nasty roll over for the BioTech leaders. Watching for signs of buying.

We are also recommending a small position in energy (NYSE:XLE), our former favorite. XLE is in a volatile downtrend, a situation when the price is trending down or sideways, but the volatility is so high that the expected return is actually positive. Volatile downtrends are very risky. Such investments should be diversified with other, less risky ones.

This week, a number of funds, including XLE, are in volatile downtrends. For XLE, the 20 day EMA is below the 100 day EMA and trending down. The 200 day EMA, currently at 69.77, might provide support.

  • Mike Davidsen (Jun 25) sees good prospects for XLE in the fall.
  • Bertha Coombs (Jun 24): Goldman Sachs: Buy Oil Stocks. Says on average, 6 mo. after [Strategic Petroleum Reserve] releases $XLE is up 3%, and bests the S&P by 5%. #oil#energy
  • @tradefast (Jun 23): Seems like an attractive entry for investment [in] $XLE

Finally, we are recommending a tiny position in pharmaceuticals (NYSE:PJP). Since the peak made on May 31, PJP has been trending down. It is now in a volatile downtrend, just like XLE. By our estimation, XLE has more potential, but PJP could turn positive as well. The price is sitting on the 20 day EMA. Both the 100 day and 200 day EMA’s are rising.

  • @Newsy_Videos (Jun 25): SCOTUS hands Big Pharma two victories regarding generic drug labeling and marketing.
  • Forbes (Jun 23): Good news for data miners: Supreme Court rules pharma marketers have constitutional right 2 buy prescription records

As the Risk / Reward plot shows, IBB’s risk has dropped over the past week, while the risks of the other funds shown have stayed literally “off the charts”. IBB has a reasonable expected return, though XLE’s expected return is now a tiny bit higher. Large-cap stocks (NYSE:SPY), representing the overall market, has a huge risk and only a moderate expected return.

Last week’s recommendation:  Last week, we also recommended a small position in real estate (NYSE:IYR) that we are no longer recommending. Accounting for the dividend paid out on Friday, IYR has stayed almost flat last week. Its expected return has practically not changed, while the expected returns of all three funds that we are recommending have increased and are now higher than IYR’s. IYR’s risk has also increased and is now higher than IBB’s. On Friday, IYR traded below its 100 day EMA.

  • @chewtonic (Jun 25):$IYR & $IWM going to be my favorite shorting vehicles going forward…as credit tightens, they’ll feel most pain #WORDEN
  • @gtotoy (Jun 24):$IYR The IYR is so important to overall health and trend of the market. A major test failed.
  • Wall St. Cheat Sheet (Jun 23):New #Home Sales Dropped This Much in May $IYR $XHB #realestate

New highs: Malaysia (NYSE:EWM) has made a new high on Tuesday but quickly retreated. It is actually moving sideways, not up. There is potential for a positive return due to the high volatility, but both XLE and PJP, which we are recommending, are better high volatility plays.

Popular: The long-term expected return for SPY is only moderate, and it has a huge risk. Both the 20 day EMA and the 100 day EMA are trending down. The price is below the 20 day EMA which is below the 100 day EMA. The 200 day EMA, currently at 125.41, might provide support.

Gold (NYSE:GLD), just like many other funds right now, is in a volatile downtrend. As mentioned above, this means that being long GLD is very risky. XLE and PJP are better high volatility plays.

Stay away from: Japan (NYSE:EWJ) remains the worst fund that we follow. Its expected return is moderately negative. The downtrend actually started at the beginning of March — before the Fukushima Daiichi nuclear disaster.

  • @Hedgeye (Jun 20): We are short $EWJ/Japan. May trade balance (¥853.7B) vs cons (¥744B)/worse than consensus/2nd biggest since data were made available in 1979.


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