Biotech BasketGenerally speaking we're all pretty aware that a "Buy & Hold" strategy works well. Yet, we find outselves "trading". Despite the evidence indicating this is unwise.
In a snapshot view we can take a look at the daily chart (nearly a years worth) and view our 3 stocks in the Biotech basket - and we can pick up some obvious patterns.
These stocks are very much sentiment based. They swing wildly, before Earnings calls - but less after.
These stocks move with extreme volatility. This is typical of sentiment driven stocks.
These stocks offer plenty of activity for a swing trader, or scalper, and show trade-able features.
I'd like to talk about rebalancing .
The items I mentioned before are true, and seem as though they add up to a perfect suite of scenario's for a trader to load up on downtrends midcycle before an earnings call. I wouldn't argue with that type of play, I think it'd probably make quite a bit of money. Especially if you were doing it with derivatives. That is a great strategy. There are many that could be applied. Today, we're going to explore a boring one: Re-balancing.
Selecting a basket.
This is no small feat. Many people would pull up a screener and begin going to town on fundamentals, reading news, and generally looking for data which would show a stock in our Biotech sector to either be developing "an un-fair advantage" or to "be significantly mispriced". That's ok. You SHOULD do that. Thats called research, and it should be the majority of what you do as a trader. It should be be even more-so as an investor. Today we cheated. Thats right.
We took a look at the Portfolio of Orbimed's top ten holdings, and decided to look at three stocks which in the last quarter Orbimed was bullish on. Orbimed chose to increase holdings of 3 companies. REGN , CI , NASDAQ:VRTX , and we will use these 3 stocks as our basket today. Why? Because they're good stocks.
Prove it?
Done.
Now what is re-balancing and why does a trader care?
Rebalancing is a tool most commonly used by Investors . It is useful because it keeps an Investors Risk Management in correlation with their Risk Appetite. This is important, especially for long term holders. In a group as volatile as Biotech, it is even more important - as it lends well to to explosive compounding and can lead to wildly unbalanced portfolios in a relatively short time. One of my favorite examples of rebalancing (and the only one we will discuss here) is practiced by selling and buying based on risk thresholds. A threshold is set like so:
Define a risk appetite (percentage of holdings to go into a given asset class)
Define a risk factor (percentage of individual positions of a given sector of holdings)
Manage risk (buy or sell from a position to meet the percentage guidance originally set)
I.E 33% REGN , 33% CI , 33% VRTX
Keep in mind you can overweight or underweight any position you choose. Afterall, it is your portfolio, and you are a trader!
Why do you care?
Following this set of principles gives the trader Long-term-guidance . This is one of the most overlooked portions of a traders strategy. There must be some form of long term guidance. This is why a trader should care. We looked at the stocks aforementioned and pointed out many points for which a trader could buy, or sell, to seemingly outperform the market. Likely, a good trader with good indicators trading in between earnings calls would indeed do well.
Now lets take a look at the long term.
To Be Continued....
