Stay away from drugs.
That’s good advice for bored teenagers on a Friday or Saturday night. It’s good advice for sailors navigating between Venezuela and Florida.
And, it’s good advice for investors hoping to profit over the next few weeks.
Drug stocks tend to behave poorly this time of year. In fact, according to TradeSmith’s proprietary seasonality tool, the drug sector declines during March 60% of the time. The average return is a loss of 1.6%. And, the declines tend to be more severe if the sector rallies hard during the previous three months.
For example, back in 2020, the VanEck Pharmaceutical Fund (PPH) fell more than 20% during March. That decline followed a blistering 15% during the previous three months – in which PPH was one of the best-performing sector funds in the market.
So, it’s worth noting that PPH is up more than 20% over the past three months. It is handily beating the return of the S&P 500 – which is barely positive for that same time frame. And, the pharmaceutical sector is one of the top-performing groups in the market.
Here’s a look at the chart…
Over the past three months, the chart of PPH has formed a bearish rising wedge pattern with negative divergence on the momentum indicators. This sort of pattern usually resolves with a break to the downside – where the decline wipes out most of the gains from the rally that formed the wedge pattern.
In other words, PPH is vulnerable to a decline back down to its December low near $97.50. That’s about a 12% drop from Wednesday’s closing price.
If you look closely at the right side of the chart, you’ll notice PPH has already broken below the support line of the rising wedge pattern. So, there’s a good chance the decline has already started. If so, then look for your favorite drug stocks to get cheaper over the next few weeks.
Based on the seasonal trends, and the technical setup of the chart of PPH, traders should have a better opportunity to buy drug stocks towards the end of March than they do today.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
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