Have we reached a tradeable bottom in the biotech bear market?

Today’s tape showed good volume but gains faded late in session.

NASDAQ up 0.35%         XLV up 0.88%-healthcare is the leading sector

The biotech market bounced back early today in a broad rally then faded with the IBB up 0.625 % stuck in 250-260 range and the XBI up 0.5%. Large caps were mainly green across the board: Celgene (CELG) up 2.65%, Alexion (ALXN) up 1.73% and Amgen (AMGN) up 1.15% among the leaders. Mid caps were choppy: Alkermes (ALKS) up 2.65%, Incyte (INCY) flat and Vertex (VRTX) up 1.98%; smaller cap winners were : Medivation (MDVN) up 4.4%, Kite Pharma (KITE) up 1.64%, and Ultragenyx (RARE) up 3.1%. Caution: we have not yet had a three day rally and today was a bit disappointing.

Our Life Science Portfolios are being “reset” as we navigate the malaise of macro issues and earnings reports. Although the healthcare sector offers good investment alternatives in a market that is seeking value, safety and yield, the sentiment has shifted toward extreme caution. Biotech stocks first need to recover from the 2015 “bubble” mentality that has severely damaged the market near term with the IBB off 25% YTD and 31% off bull market highs in August. It has become very difficult to analyze stocks based upon product pipeline, technology or market potential when the market views growth more skeptically and looks for real financial returns from cash flow, profits and dividends. Moreover it will become more difficult for emerging companies to raise money at an attractive price.Consequently investors need to focus on large cap biotech where financial metrics and new products are more easily evaluated. But biotech has always attracted traders and speculators so the momentum will return to the upside should global fears wane. In the meantime look for the following trends:

  • Technicals: look for a firm bottom to the IBB and XBI which sold off earlier this week. Technicals matter more than fundamentals with mid and small caps because valuations do matter on a relative basis.
  • Sentiment: in a risk-off market where macro news dominates and oil prices drive equities you need to be patient and be selective in stock selection. Drug pricing will remain an underlying political issue to dampen sector enthusiasm.
  • Financial metrics and value: until we get out of this biotech bear market we can pick stocks based on revenue growth and balance sheet along with late stage product pipeline.A strong dollar remains a negative factor for multinational company earnings.
  • New Portfolio:we have posted recent stock performance and financial data for eight well-known biopharmaceutical companies that can lead the way up out of this oversold market. As of this date only 2/8  stocks are higher now than on 1/31- Gilead Sciences (GILD) and Celgene (CELG). Bristol-Myers (BMY) is relatively stable.
  • FED Matters: stocks rallied big in the first few hours then faded as testimony  continued. Overall Yellen was dovish but did not take a rate hike off the table.

We will gradually add stock picks based upon fundamental information and recent technicals. The individual picks would evolve into a re-jiggered portfolio that would beat benchmark ETFs such as the IBB and XBI. Recently we selected three stocks to buy in our initial portfolio : ABBV, BLUE, and GILD. The biotech sector should outperform the market in 2016 if the healthcare sector holds up because it will be more insulated from macro turmoil.

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