Big pharma's enigma

December 19, 2016 01:00 PM
Cycle Projection Oscillator: Rocket science meets markets

The Cycle Projection Oscillator (CPO) is a technical tool that uses complex algorithms to filter multiple cycles from historical data, combines them and gives a graphical representation of their productive behavior. The CPO methodology employs proprietary statistical techniques to obtain cyclical information from price data. Other proprietary frequency domain techniques then are employed to obtain the cycles embedded in the price.

Biotechnology index (IBB)

One of the big winners following President-Elect Donald Trump’s surprise victory was the pharmaceutical sector. Hillary Clinton promised action following recent price gauging scandals within the sector making her a pariah in the industry and arguably causing weakness as she was expected to win the election. The Biotechnology Index (IBB) surged following the election moving it from oversold territory in the CPO. However, the CPO expects IBB to make a top by year-end and turn sharply lower in 2017. Given its fundamental strength following the election, there may be a tremendous opportunity to short IBB from a very high level if the CPO forecast is correct. 

KBW nasdaq bank index (BKX)

Another market sector that spiked following the election was banking (see “Market reacts,” page 12). The KBW Nasdaq Bank Index (BKX) moved into oversold territory in the CPO following a post-election spike higher. The CPO is forecasting a downturn for BKX in December. While the CPO forecast for BKX is not nearly as bearish as it is for IBB  (or expected to last as long) the shorting opportunity may be greater because of the oversold level of where BKX is currently trading.

Gold 

Like many markets, gold whipsawed on the evening of the election, rallying on fear of the unknown and receding when the broader equity market decided that a Trump presidency might be good for markets afterall. The spike was a shorting opportunity because the CPO still sees some downside for gold, though it expects the shiny metal to make a bottom in December and then turn positive in 2017 before receding once again in Q2.

John Rawlins (p 80)

About the Author

John Rawlins is a former member of the CBOT with more than 30 years of experience in trading and research. He co-developed the Cycle Projection Oscillator, which has been featured in Futures and numerous research reports, with an aerospace engineer to identify the dominant cycles in a data stream and project them into the future. Reach John at johnrawlins@msn.com. @cpopro1. You can reach John at johnrawlins@msn.com.