Concerns About The Global Economy And Massive Debt Bring Us To Bear Market Boundaries

The first day of the fourth quarter of 2011 held out hope for a new market direction, but the relentless selling from Q3 persisted with the major averages off more than 2.5%. The market tried to rally in the first two hours but underlying concerns about Europe/Greece and   a strong dollar drove everything lower. Biotechnology stocks(IBB $89.12) have outperformed down 4.59% YTD compared to the S&P down 12.59% YTD. However, today for the first time this year the biotech sector was down 4.53% worse than the S&P down 2.85%. The XLV healthcare ETF did a little better down 3.18%. The XLV is down 2.48% YTD. The XLV(30.72) has been more stable and defensive in this treacherous market due to top holdings of large cap dividend stocks such as JNJ, Pfizer, Abbott, Merck and Bristol Myers. The 12 month technical bottom for the XLV is$29.50. Many of these large cap drug stocks outperformed the S&P today. The IBB has not breached its 12 month technical bottom at $84.

As we have written earlier the two main concerns about the healthcare sector are:

  • Lower healthcare utilization due to cutbacks in elective procedures and
  • Government cutbacks in Medicare reimbursement and NIH budgets.

Recently Leerink Swann noted layoffs at WashU’s Genome Institute due to reduced funding from the NHGRI (National Human Genome Research Institute) posing headline risk for sequencing leader Illimina (ILMN). NHGRI funding was reduced from$100M to $90M.Overall diagnostics and tools stocks sold off big today down over 4.37%. We urged avoidance of the tools/diagnostics stocks due to Q3 earnings risk and the overall bear market backdrop.Although selected stocks offer good value for the longer term the market headwinds are too great at this time. Moreover the ebullience of M&A  in Q2 created by the GenProbe auction and other deals  has dissipated. Nonetheless we expect Q4 will offer buying opportunities but currently any good news or trends are eclipsed by the MACRO environment.

The mid-cap biopharmaceutical sector fared even worse today with our index down 5.4%. The concern with all mid and small cap biotech companies would be a strong balance sheet. Other popular biotech ETFs (FBT,XBI) were down in line with the IBB about 4.6%.

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