[Charts] Biotech, China, and an Emerging Contrarian Opportunity

Lou Basenese

Friday, August 20, 2021

When Fridays roll around in the Trend Trader Daily Nation, we roll out the charts.

All it takes is a quick glance — and you’ll be up to speed and poised to profit from the market’s most important trends.

This week, I’m dishing on the long overdue bounce for biotech stocks, the impact of more privacy restrictions in China, and perhaps the most contrarian investment opportunity out there.

So without further ado...

Biotech Bounce?

As I write these words, the SPDR S&P Biotech ETF (XBI) is up over 3% on the day. If it holds, that’s a sharp reversal of the trend.

In case you haven’t noticed, the major biotech ETF has been slip slidin’ away 1% to 2% per day — on no fundamental changes.

As I’ve noted before, biotech is enjoying record venture funding, a strong IPO market, and companies in the sector are literally saving lives.

But still, countless biotech companies report promising data for new drugs — and their shares sell off.

What gives? Simple: overall risk reduction in the market has prompted investors to bail en masse. Take a look:

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Here’s the thing: historically, when biotech comes back into favor, it does so in a hurry.

Prices won’t stay depressed for long — particularly the prices of small- and micro-cap biotechs with the most promising drug candidates.

Bet on it!

Big Trouble for Big Tech

The only thing worse than holding stocks in a confirmed downtrend — despite no negative change in fundamentals — is holding stocks in a downtrend with deteriorating fundamentals.

And that’s precisely the situation plaguing Chinese tech stocks right now.

As you can see below, the bottom’s falling out for China’s biggest tech stocks, as represented by the Hang Seng Tech index.

The culprit? More government intervention and regulation regarding data privacy.

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With the likelihood of even more intervention on the horizon, don’t even think about trying to buy the dip.

Emerging Opportunities

But if you are in the buying mood, take a good look at emerging markets as a whole.

Why? Because forget biotech or Chinese tech stocks — emerging markets stocks are the most unloved in the world.

Despite accounting for two-fifths of global GDP and about 25% of global stock market value, U.S. investors have just marginal exposure, if any, in their portfolios.

But now might be the perfect time to add some exposure.

Why? Because emerging-market stocks are lagging behind U.S. stocks by the biggest margin in two decades. And such underperformance never persists indefinitely.

(click image to enlarge)

In fact, we’re at such an extreme that a rapid reversal appears imminent. And I say that with conviction, because emerging markets stocks are universally cheap. They’re trading for just 12 times forward-earnings, as compared to 20 times for U.S. stocks.

If you’re a contrarian at heart and you like buying stocks for a 40% relative discount, I’d consider the iShares MSCI Emerging Markets ex China ETF (EMXC).

That’s right. You can get exposure to all the emerging markets, minus today’s most risky one (China) in a single ETF.

So what are you waiting for?

Ahead of the tape,

Tags: big-tech biotech