A Bumpy Road For Biotechs?

All's quiet on the market front as Wall Street awaits Fed Chair Janet Yellen's testimony before Congress tomorrow and Wednesday. Today saw minor gains in most of the major averages with biotechs and healthcare stocks making the biggest moves. Biotech has been on a roll since the middle of last April with the biotech etfs FBT, XBI, IBB, and BBH gaining more than 60% since then.

The question now is whether the biotechs will continue to run. Judging from today's topping tails in the daily candlestick charts of the above etfs, it appears as if they may be on the verge of taking a well deserved break. (A topping tail is an indication that buying pressure is drying up.) All of the above etfs are trading well above their moving averages and while a stock can do so for a while, it eventually reverts back to the mean.

One way to play a sell-off in biotechs is to buy puts on the above etfs. Of the bunch, the XBI has the most liquid options. The March 330 put has the highest open interest at over 2k contracts and last traded for $3.30. Another way to play it is to buy the double inverse biotech etf, BIS. This fund is down 65% since the beginning of the biotech rally last April which pretty much mirrors the rise in the biotechs. Today it formed a bottoming tail, the reverse of the topping tails seen in the biotech etfs. This gives some confirmation to the thesis that this space is in for a fall. If you're not familiar with inverse leveraged funds, you should note that they are designed to mirror their counterparts on a daily basis only. As such, long-term investors would do best to avoid them.