Biotech Bear Market Rally Headed Toward Triple Top

The biotech rally has wobbly legs moving briskly from the Brexit lows but with choppy action recently.This would be the third time biotech stocks will try to gain momentum toward higher highs although lows are holding. While technicals will give you the navigation for weighting  in the sector we will look at various vehicles to trade and position a biotech portfolio for the long-term. And as always we provide our own picks for profits both for trades and longer term portfolio. Three of our picks: ABBV,BMY,FMI are beating the market and we still believe Gilead Sciences (GILD) has good value despite weak stock action. In late April we took a look at major biotech and healthcare ETFs and provided a comparison to the best performing diversified health science funds. The major biotech ETF (IBB) is still 9 points lower than the two recent tops on April 27 and June 6.We called a move from lows to the $270 mark now $280 is within range. The XBI is near the triple top near $60.

The broader healthcare XLV is the leader up 3.67% YTD. However the healthcare sector underperforms the S&P which is up 6.4% YTD. NASDAQ is lagging up only about 1.64% YTD. Biotech performance correlates with the NASDAQ. Health science funds that are large cap and more diversified outperform biotech.

Here are some key take-aways and trends to watch:

  1. The actively managed Fidelity Select Biotechnology Portfolio (FBIOX), assets $9.8B, underperforms major ETFs by about 5% and is down about 23.5% YTD.The FBIOX favors well known large caps that have underperformed the IBB such as ALXN, BIIB, GILD, REGN.
  2. Broadly diversified life science ETFs like the XLV beats pure play biotech vehicles. Diversified funds also can outperform. The PRHSX T.Rowe Price Health Sciences Fund beats biotech but it is still down about 4.8% YTD. The Black Rock Health Sciences Fund (SHSAX) flat YTD beats pure play biotech but the fund is broadly diversified with large cap drugs, devices and United Health (UNH).
  3. Technicals need to be re-emphasized because of resistance at recent tops. XBI, assets $1.98B is the ETF to buy on rallies like today because of volatility and position turnover.
  4. Q2 earnings will be important for large caps and clues to earnings trends for 2016. Celgene (CELG) is an important bellwether stock especially now that is trading above $104.
  5. The diagnostics and tools sector are also in a funk until we get better earnings guidance and top line growth potential for Q4. Our lone pick at $20.40 is Foundation Medicine (FMI) a leader in pharmacogenomics and molecular medicine for oncology.

Until we get Q2 earnings technicals rule. Global uncertainty has curbed overall risk in the market but the US economic data is improving and the FED is on hold.

Disclosure Long ABBV,BMY,FBIOX,FMI,GILD other small caps.

XBI SPDR S&P Biotech ETF daily Stock Chart


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