Biotech Breakdown: Seeking Relief Today

At Close: IBB down 2.35% to 342 at May bottom, XBI up 0.64% to 218

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Two Hours to Go 2:15p EDT, NASDAQ Down 1.79% at 4792, IBB at $349

Biotech Breakdown: Relief Today Or Another Head Fake?

Biotech stocks are trying to hold the May lows with the IBB at $342 but now at $349. There is bit of buying today and most biotechnology indices are off their lows with more green than red among widely followed mid and small cap stocks. Institutions drove biotech stocks to new highs in July and apparently went on holiday for August.The sell-off was not un-expected with an IBB short position up to 34% of float. This would be the third major correction of the year but not a bear market as the volatile, more speculative XBI is still up 19% YTD as of late-day trading and now up over 2%. Many small caps inexplicably are finding buyers today as the broad market sell-off is hitting large, more liquid stocks harder. But many high flying speculative stocks are off 50% or more from 2015 highs and the overall sentiment has definitely taken a more cautious note:

  • Valuations now do matter and $3B+market caps will be scrutinized.
  • Rampant speculation in small caps may be curbed.
  • Healthcare and biotech stocks will no longer be immune to macro events.
  • Technicals are the way to play the sector with ETFS and large caps favored.
  • Expect a fourth quarter rally unless Q3 earnings disappoint.

Read our prior posts beginning with the early warning signal on weak biotech momentum. At the time of the April correction we reviewed market trends and three of these trends are weak.

Remain cautious as we were faked out by the reversal last Friday. See if the XBI bottom holds today at $210. Update over the weekend.

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