Mixed Messages on Biotech Sector with Strong Fundamentals, but Overvalued Currently
The current health crisis has created a lot of buzz around the biotech sector as several companies from the sector are working on potential vaccines against the COVID-19 virus. That buzz has created somewhat of a mixed message for the sector as a whole. Many of the companies are overvalued at this time, but the fundamentals of many are really good.
I looked at the SPDR S&P Biotech ETF (NYSE: XBI) and its components. First, I looked at the chart of the ETF itself and saw the huge bounce off of the March low—moving from the $65 area to over $110 in approximately three months. As impressive as the move is, it is also troubling for someone like me that has a hard time buying stocks or ETFs when they are overbought.
After looking at the chart and the move the XBI has made, I started looking at the individual companies and their fundamental ratings along with the scorecard grades from Tickeron. What I found there was pretty impressive.
Of the 85 components in the XBI, 41 are rated as a “strong buy” and 17 are rated as a “buy”. There are seven “hold” ratings, eight “sell” ratings, and 10 “strong sell” ratings. There were also two that didn’t have a rating on the scorecard. I found it to be a really good sign for the long-term prospects of the sector with almost 70% of the ratings coming in at a buy or better. Keep in mind these ratings are strictly based on artificial intelligence, they aren’t the same thing as analysts’ ratings where human opinions are taken in to account.
The problem with the components is that so many are overvalued at this time. Of the 85 stocks in the fund, 45 are “overvalued”, 29 are “fairly valued”, and only 11 are “undervalued”.
The biotechnology industry involves genetic or protein engineering. The goal is to produce medicines or therapies for treating and preventing ailments. The industry also provides crucial ingredients for diagnostics. This multi-billion dollar industry is heavily focused on research and development. Companies are continuously attempting to come up with cutting-edge solutions for health. New discoveries for the treatment of diseases provide growth opportunities for the companies. However, discoveries must pass regulatory approval from the U.S. Food and Drug Administration (FDA) before they can make it to markets.
Some of the most notable companies in the group are Amgen Inc. (NASDAQ:AMGN), Gilead Sciences, Inc. (NASDAQ:GILD), Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN), Illumina Inc (NASDAQ:ILMN), Biogen Inc (NASDAQ:BIIB), Alexion Pharmaceuticals Inc. (NASDAQ:ALXN), Moderna Inc (NASDAQ:MRNA), Incyte Corp. (NASDAQ:INCY), Exact Sciences Corp. (NASDAQ:EXAS), and Sarepta Therapeutics Inc (NASDAQ:SRPT).
Of those notable companies, only Amgen falls in to the undervalued category at this time. Exact Sciences is fairly valued and all the rest of those notable companies are in the overvalued category at this time.
What all of this suggest to me is that the long-term prospects for the XBI and the biotech sector as a whole are really good. But investors might want to wait for a pullback before jumping in.
One particular technical indicator that jumped out at me was the RSI indicator. Over the last three weeks or so, 36 of the stocks in the XBI have received a signal from this indicator and only four of those 36 were bullish signals with good odds of success. There was one bearish signal that didn’t have good odds of success, but there were 31 bearish signals where the odds of success were at 60% or better.
Given all of this information, I can see making a bullish trade on the biotech sector if the stocks as a whole see a little pullback. If enough of the stocks go through a little downturn, it should reduce the number of stocks that are overvalued. Such a move would give investors a chance to enter a trade without buying when the indicators are in overbought territory.
XBI's RSI Indicator peaks and leaves overbought zone
The 10-day RSI Oscillator for XBI moved out of overbought territory on June 11, 2025. This could be a sign that the stock is shifting from an upward trend to a downward trend. Traders may want to look at selling the stock or buying put options. Tickeron's A.I.dvisor looked at 20 instances where the indicator moved out of the overbought zone. In of the 20 cases the stock moved lower in the days that followed. This puts the odds of a move down at .
Technical Analysis (Indicators)
Bearish Trend Analysis
The Stochastic Oscillator entered the overbought zone. Expect a price pull-back in the foreseeable future.
Following a 3-day decline, the stock is projected to fall further. Considering past instances where XBI declined for three days, the price rose further in of 62 cases within the following month. The odds of a continued downward trend are .
XBI broke above its upper Bollinger Band on July 02, 2025. This could be a sign that the stock is set to drop as the stock moves back below the upper band and toward the middle band. You may want to consider selling the stock or exploring put options.
Bullish Trend Analysis
The Momentum Indicator moved above the 0 level on July 02, 2025. You may want to consider a long position or call options on XBI as a result. In of 95 past instances where the momentum indicator moved above 0, the stock continued to climb. The odds of a continued upward trend are .
The Moving Average Convergence Divergence (MACD) for XBI just turned positive on July 03, 2025. Looking at past instances where XBI's MACD turned positive, the stock continued to rise in of 56 cases over the following month. The odds of a continued upward trend are .
XBI moved above its 50-day moving average on June 02, 2025 date and that indicates a change from a downward trend to an upward trend.
The 10-day moving average for XBI crossed bullishly above the 50-day moving average on May 30, 2025. This indicates that the trend has shifted higher and could be considered a buy signal. In of 15 past instances when the 10-day crossed above the 50-day, the stock continued to move higher over the following month. The odds of a continued upward trend are .
Following a 3-day Advance, the price is estimated to grow further. Considering data from situations where XBI advanced for three days, in of 297 cases, the price rose further within the following month. The odds of a continued upward trend are .
The Aroon Indicator entered an Uptrend today. In of 205 cases where XBI Aroon's Indicator entered an Uptrend, the price rose further within the following month. The odds of a continued Uptrend are .
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Fundamental Analysis Ratings
The average fundamental analysis ratings, where 1 is best and 100 is worst, are as follows
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