LABU - LABU: Buy As The Biotech Sector Starts A New Bull Market (Technical Analysis)

2023-12-16 08:35:19 ET

Summary

• Seeking Alpha Quant rates LABU as a strong Sell, but I rates it as a Buy due to bullish market conditions.
• LABU is a leveraged ETF that seeks to track 3x the daily performance of the S&P Biotechnology Select Industry Index.
• I believe LABU has strong momentum and is outperforming the broad market, making it a favorable investment.

Summary

Seeking Alpha Quant rates [[LABU]] as a strong Sell. I rate it as a Buy because the underlying index is bullish. The recent decline in interest rates have led to better access to investing capital for small companies, including the small cap biotech. We believe that the current economic and market conditions are favorable for investing in biotech stocks.

LABU - Direxion Daily Biotech Bull 3X Shares ETF

Fund Details

Fund Type Miscellaneous

Issuer Direxion Funds

Inception 05/28/2015

Expense Ratio 1.01%

AUM $1.23B

# of Holdings 145

*Holdings as of 2023-12-12

The fund seeks to track 3x the daily performance of the S&P Biotechnology Select Industry Index .

As of December 12 2023, the Direxion Daily Biotech Bull 3X Shares ETF has net assets of 1.23B. It paid 0.19% dividend yield and had an expense ratio of 1.01%.

Top 10 Holdings

Goldman Sachs Sterling FixInc Port Inc 11.19%

S&P Biotechnology Select Industry Index Swap 6.56%

Goldman Sachs Fin Gov 465 Institut 2.76%

Immunogen Inc 1.41%

Blueprint Medicines Corp 1.18%

Mirati Therapeutics Inc 1.18%

TG Therapeutics Inc 1.13%

Apellis Pharmaceuticals Inc 1.10%

Immunovant Inc 1.08%

Biohaven Ltd 1.02%

Total28.61%

# of Holdings145

*Holdings as of 2023-12-12

Investment Thesis

I rate LABU as a BUY, with expectation of healthy gains for as long as the new bull market in its underlying biotechnology index lasts.

There are a number of factors that support the thesis.

On the fundamental side, the recent FED halt in raising interest rates improves the business environment for small cap companies.

On the technical side, LABU made a strong trend reversal at the end of October. Since then, the fund has been in a sustained uptrend.

Price Action

The chart below shows the price action of LABU over the last twelve months. It suffered huge losses since the beginning of February to the end of October. Since the end of October, LABU has been in an exceptionally strong uptrend.

The next chart shows the total returns of LABU (blue) and [[SPXL]] (red), the 3X leveraged ETF based on the S&P 500 index over the period from October 27 to December 15. LABU (123.25%) returned more than double the return of SPXL (47.99%).

Analysis of the leverage effect

Because LABU is a leveraged instrument, it is appropriate to analyze its performance relative to the stock index on which it is based. The next chart shows LABU’s (red) price evolution versus that of the Biotechnology Index (blue).

The chart clearly shows that LABU is not suitable for long term holding. While the index has returned about 10% since the fund’s inception, the leveraged fund lost about 97%.

From the chart it is also evident that both the index and the leveraged fund display long periods of directional trends. The chart may be broken down into 9 periods, as shown in the table below. For each period, we show the returns of the index SPSIBI and those of the leveraged fund, LABU.

Observations

1. 4 periods when the index made big gains; over those periods, LABU returned more than three times. Extreme example: 3/20/20 - 2/8/21 the ratio was 6.63.
2. 3 periods when the index suffered big losses; over those periods, LABU’s losses were harder to recover from. Extreme example: 2/8/21 – 5/11/22
3. 2 periods when the index was range bound and made small gains; over those periods, LABU suffered significant losses.

The Biotechnology Index had long periods with extremely large returns. It also had similarly large declines. The leveraged fund amplified those moves. This shows the extreme risk of holding a leveraged fund in a bear market.

Market State

To determine the state of the market we compute the difference in total returns of the following four ETF pairs: ([[DBB]], [[UUP]]), ([[XLI]], [[XLU]]), ([[SLV]], [[GLD]]) and ([[XLC]], [[XLV]]) over an evaluation period. The evaluation period is variable. It is a function of market volatility.

Currently the evaluation period is 79 trading days and three of the four pairs indicate risk-on. Only one pair (SLV, GLD) indicate risk-off.

Additionally, I watch the behavior of the market implied volatility. Lately, VIX declined to levels not seen since before the COVID crash.

The market state is supportive of a continuation of the rally.

Conclusion

I rate LABU as a BUY for the following reasons:

The underlying index and most stocks in its composition are in an uptrend. LABU has a very strong momentum and is outperforming the broad market since October 27. The prevailing market expectations are for the FED to stop raising interest rates and start cutting rates by the summer of 2024.

Risk Warning

LABU, as a leveraged fund, may suffer value erosion and should only be used as a tactical, short-term investment vehicle.

Here is a detailed message from the SEC on the risks inherent in leveraged ETFs.

For further details see: