Our SectorDivergence chart for ETFs is showing Biotech stocks (using ETF IBB) overextended following the FDA's more liberal stance on passing drugs through the new drug approval pipeline. The potential arguments against this bet are that this is real news for the Biotech sector, there is a potential for brutal short-squeezes in Biotech, and the sentiment is not extremely positive (so the contrarian case is weak). Nonetheless, on a short term basis this looks like a good setup to go short.
We're also seeing excess optimism (remember, hope is not a strategy) in several falling ETFs: GDX (gold miners) and TAN (solar stocks), so we will keep those in mind as potential shorts in case of a short term rally.
Our macro view, based on sentiment, is that the stock market is clearly bullish and will likely rally into the year end given the absence of disturbing news likely to appear, with a pullback anticipated in the first and second week of January.
Happy Trading!
Richard
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