Major biotechnology funds fell to their lowest lows since January 2019 in Monday's session, continuing complex downtrends after failing to bounce back to 2018 highs in the first quarter. More ominously, accumulation readings in both major biotech exchange-traded funds (ETFs) have dropped to their lowest lows since 2017, signaling a quiet institutional exodus that could presage the start of breakdowns into multi-year bear markets.

We're less than 18 months away from the 2020 presidential election, and sharply divided political parties have found a common voice in attacking the growing power of big pharma and the biotech industry. The president has used his bully pulpit to keep pressure on these companies throughout his administration, but the threat of significant legislation continues and could escalate under a Democratic presidency.

Many biotech investors have been unmoved by D.C. jawboning, expecting the industry's massive lobbying efforts and deep pockets to brush aside any significant legislative efforts. They could be right, but massive donations have failed to slow deteriorating sentiment since 2015 scandals involving Valeant Pharmaceuticals, now Bausch Health Companies Inc. (BHC), and Martin Shkreli's Turing Pharmaceuticals.

SPDR S&P Biotech ETF (XBI)

XBI
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The broad-based SPDR S&P Biotech ETF (XBI) topped out at $91.10 in July 2015 after a multi-year uptrend and sold off to the mid-$40s a few months later. It turned higher in 2016, entering a slow-motion uptick that finally completed a round trip into the prior high in January 2018. The fund struggled to find buyers in the next five months, adding just 10 points into June's all-time high at $101.55, ahead of a late-year decline that failed the breakout above the 2015 high before hitting a 21-month low in the mid-$60s in December.

A strong 2019 bounce stalled right at the .786 Fibonacci sell-off retracement level in early April, posting a lower high, ahead of persistent selling pressure that has now dumped the fund below the 50- and 200-day exponential moving averages (EMAs) for the first time since February. The .618 retracement level cuts through January's unfilled gap between $75 and $77, marking a logical downside target for the current sell-off leg

The on-balance volume (OBV) accumulation-distribution indicator tells a bearish tale, posting a series of lower highs and lower lows in the past year, indicating that institutional capital is hitting the sidelines. OBV has now dropped to the lowest low since January 2017, when the fund was trading more than 30 point lower than this morning's opening print. This divergence predicts that price will soon play catch-up to the downside.

iShares Nasdaq Biotechnology Index Fund (IBB)

IBB
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The iShares Nasdaq Biotechnology Index Fund (IBB) tracks a market-cap weighted index that generates greater exposure to sector blue chips. A historic rally ended at the same time as the other fund in 2015, yielding a vertical decline into the February 2016 low at $80.00. The price tested that level three times into 2017 and turned higher, entering a choppy uptick that failed at the .786 Fibonacci retracement level in October 2018.

The fund fell nearly 28% into the December low and turned higher into 2019, carving a strong bounce that ended at the .786 sell-off retracement level in March. It broke new support at the 50- and 200-day EMAs a few days later and has continued to lose ground throughout the second quarter. This sell-off leg could reach the mid-$90s, completing the same proportional retracement as the broad-based fund. 

OBV readings for IBB have held up slightly better than those of its rival, probably due a greater percentage of fund components with membership in other indices. However, accumulation at a two-year low is equally bearish when the price is trading at a five-month low, predicting that downside will continue after an inevitable oversold bounce. Given the high stakes, remaining sector shareholders may wish to consider exiting positions during that uptick. 

The Bottom Line

Biotech funds are selling off while bearish sector internals reveal an aggressive exodus by the smart money.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.