Bear Market Biotech Rally Is Tradeable…Update-1

Update after close 12/16…IBB up 2.25%, XBI up 4.45%

Rayno Life Science Big Movers

Rayno Biopharma

ABBV up 2.2%,ALKS up 8.12%, BIIB up 3.52%, ARRY up 20.63 %, CRIS up 6.27%, FCSC up 5%, GERN up 4.42%,RXDX up 2.92% and SGEN up 4.93%.

Rayno Dx and Tools

ABAX up 2.57%, CPHD up 4.87%,GHDX up 2.87% and LMNX up 2.75.

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A Lively Green Tape Today Brings Help For Sinking Biotechs

The two day biotech rally is encouraging but does not give an “all-clear” signal for piling into biotech stocks although it certainly looks tradeable. First look at basic positions in ETFs and major funds in 2015. Read this post we did in 2013 comparing Fidelity Select Biotechnology Fund (FBIOX) to major ETFs. At that time the Fidelity Fund led ETFs but a lot has changed since September 2013 particularly the “biobubble” peaks of early 2014 and July 2015. Here is where we are now 2015 YTD on funds vs ETFs:

IBB 330 up 8.78% YTD

XBI 66.81 up 7.5% YTD

XLV 71.68 up 4.83% YTD

Fidelity Select Biotechnology Portfolio (FBIOX) up 3.2% YTD

T.Rowe Price Health SciencesFund (PRHSX) up 8.8% YTD

NASDAQ-100 PowerShares (QQQ) Trust up  8.77% YTD

At the peak of the healthcare and biotech run this summer (and winter) FBIOX led the pack but faltered during the summer 30%+ correction.FidoBio now trails returns on major ETFs but the dividend impact is harder to track with mutual funds. FBIOX holdings are weighted toward large caps similar to the IBB.

And here is a quick review of key biotech market indicators:

  • Technicals have been very week with a broken SMA 20 line for the IBB but rallying to the SMA 50 line today. The XBI has broken through both lines but is up over 3% today holding above the critical $65 level.
  • Fundamentals have been disappointing with sentiment dampened by pricing concerns and a few high profile clinical failures. Q3 earnings were OK but Q4 will be scrutinized. The bullish assumption is that biotech and large cap drug stocks deliver growth from new products.
  • The tape has been good with 90% of biotech stocks up with a rising market; today for example ALKS, ALXN,BMY,INCY,REGN are near new highs.
  • Small caps need to show more strength and less volatility as they did in previous bull runs. Many of our new small cap biotech picks from October shot up but sold off hard in early December. Curis (CRIS), Geron (GERN) and Imprimis (IMMY) still look good. Small caps are lagging YTD with the IWM down 5.78%.
  • The FED could be an issue if several rate increases take place in 2016.A FED rate hike is expected today. Healthcare stocks could underperform with rising rates. The healthcare sector has been on a huge run since 2011 propelled by new blockbuster cancer and HCV drugs and ObamaCare -ACA but healthcare costs are rising and Congress is attacking the Affordable Care Act (ACA).

Summary

  1. The seasonal biotech rally can still happen through early January. Biotech ETFs beat the market despite the big sell-off.
  2. A balanced portfolio is urged in healthcare maybe with combination of FBIOX, IBB and PRHSX; XBI for aggressive portfolios.
  3. We are still almost 18% off July highs and need to catapult out of a downward channel in the sector to confirm a long term secular bull market.

IBB iShares Nasdaq Biotechnology daily Stock Chart

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