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  1. Is there a way to trade the spread of P/E ratio of the S&P vs major biotech? Biotech has gone below the market where historically it has traded at a premium. Fundamentals, earnings, blah, blah, blah! Out of whack like you see commodity spreads. Just curious.


    • I am not sure if there’s a way to take advantage of a P/E ratio, but there’s definitely a way to play a spread between the S&P 500 and the biotech sector with ETFs. You can trade the SPY for the index and XBI for the biotech sector.

      From the 2009 low, the SPY increased three-fold while XBI increased more than six-fold. Biotechs obviously outperformed.

      SPY is trading at about three times the price of XBI right now. To trade a ‘dollar neutral’ position on this spread, you would trade three shares of XBI against one share of SPY.

      Looking at a chart of three XBI against one SPY, it appears that a major peak was formed in July. After a failed bounce off the August low, the meltdown continued over the last two weeks. If an October bottom does not reverse the trend it appears that a return to -$50 to -$60 (premium SPY) is quite possible. This is where the spread between three XBI and one SPY spent a lot of time in a price range between 2010 and mid-2014.

      I couldn’t post the charts in this response, but I can email you attachments if you are interested.


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