(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of CELG, ALKS, GOOGL, V, VZ, MA.)

The Nasdaq Composite and Technology stocks took it on the chin Monday, with the Nasdaq Composite falling by nearly 1%. The technology sector as measured by the Technology Selector Sector SPDR (XLK) decreased by almost 1.25%. Surprisingly, the risky Biotech names were up on the day with the NASDAQ Biotech ETF (IBB) jumping by nearly 60 basis points. It was the big biotech names, such as Amgen Inc. (AMGN), Celgene Corp. (CELG), and Gilead (GILD), leading the charge in a group that should be getting pressured with the rest of the risk sector. In fact, the only sectors up are the defensive sectors like the Consumer Staples SPDR (XLP), Utilities Select Sector SPDR (XLU) and Energy Select Sector SPDR (XLE). 

(Data from Ycharts)

Biotech Thrives

Biotech, a high beta group, is thriving today with the risk adverse sector which seems to be a surprise. The underlying technicals biotechs, as measured by the Nasdaq Biotech ETF (IBB), continue to remain strong in a weak broader market sell-off. As we have noted before, the group continues to be stuck in a range that started at the beginning of September. The Technology Select Sector SPDR (XLK) technicals suggest the group could have some risk to the downside in the coming days. (For more, see also: Gilead, Amgen, and Biogen May Lift Biotech Higher.)



Biotech Group Has 5% Upside

The chart of the IBB continues to trend sideways and is locked into a channel, setting up a pattern called a flag or pennant. This would be a bullish formation, one that could take the ETF towards the $345 level, a move of about 5% from current levels around $330. Of the top 25 holding, only seven finished the day lower on Monday. The biggest gainers in the group were United Therapeutics Corp. (UTHR), Alnylam Pharmaceuticals Inc. (ALNY) and Alkermes PLC (ALKS).

Technology Sell-Off


The chart of the Technology ETF suggest there could be more downward pressure on the group over the coming days, with the potential for the ETF to fall by another 2%. The group has been in a channel as illustrated on the chart since February of 2016, and for the most part, has rallied every time the price has fallen to the lower range. The technology sector saw 20 of its top 25 names fall on Monday, with stocks like Facebook, Inc. (FB), NVIDIA Corp. (NVDA), Applied Materials Inc. (AMAT) and Adobe Systems Inc. (ADBE) responsible for the biggest losses, each falling by more than 3.5%. The two important stocks to watch over the coming days to gauge the sentiment of the group will be Apple Inc. (AAPL) and Microsoft Corp. (MSFT), since they hold the biggest weighting. (For more, see also: Amazon, Alphabet, Facebook Earnings Will Make or Break Tech's Bull Run.)

The divergence in the two risk-on sectors of the market is noticeable and one worth monitoring to see how it develops over time. More importantly is what the divergence could mean for the broader market going forward. 


Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.


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