Biotech Momentum Lost

Technical Breakdown: XBI Near April Bottom but XLV Looks Good

Market Looking for Growth from Large Cap Earnings

10 year auction has tepid demand at Yield of 3.225%, NASDAQ at 7602 own 1.75%

(Prices as of mid-day 1:30 p EDT)

Biotech momentum losses were triggered by a reversal in investor psychology  because of macro-economic news and a momentum shift. Major stock market indices particularly NASDAQ and FANG stocks are being reset. The market has broken through technical support with volatility rising and speculation in smaller caps crushed with the Russell 2000 IWM down 7% over one month. The sell-off has also been quite severe in many of the hot momentum driven mid-caps since the summer rally. Keep in mind that the tax cuts created excessive exuberance at a time when the market was already doing well.

How can investors focus on biotech stocks when the news cycle dwells on rising rates, excessive debt, a trade war with China, and now with a potential slowdown in global growth?

The small cap weighted more momentum driven, speculative SPDR S&P Biotech (XBI) is down 13% in 3 mos. off recent highs in June and July with a lot of selling in September and October so that it is now flat to down 1% YTD.

The larger cap weighted IBB has done better but after two recent double tops at the $121 level, the selling picked up in October down over 5% over five days and up only 3.7% YTD.

The more diversified First Trust Area Biotech FBT is still up 15.5% YTD  because of better stock picks for example: ICPT, TECH, NKTR, ACAD and NBIX. FBT has led all ETFs in performance for 12 mos. and in 2018.

The Fidelity Select Biotechnology Portfolio (FBIOX) is up 6.3% YTD including dividends.The Fund is consistently better than the IBB. The fund is focused in large caps with AMGN #1 holding but had also big winners to watch such as ALXN LOXO NBIX and SRPT. The big loser was Celgene (CELG) down 16.86% YTD now at $85 level.

Looking back on our Mid-Cap Biopharma watch list we see a huge momentum reversal from 52 week highs in some high fliers:


Look at the following Mid and Large Cap Biopharmas are doing well recently and YTD:


So it has been a difficult market for traders and the recent NASDAQ correction had taken a severe toll on many stocks. Earnings season lies ahead over the next two weeks and the market wants to see top line growth but guidance will be clouded by tariffs and currency.

One positive has been the steady outperforming healthcare sector (XLV) up 12%  YTD and 14.3% over 6 mos. and holding at the $93 level. Large cap biopharma and drug stocks have held up extremely well though the October correction: AMGN BMY RHHBY MRK. We’ll see if Q3 earnings can maintain the top line growth forecasts.

With the steady thrashing of more speculative momentum stocks and a parade of  “red screen” days we need to just follow the technicals and choose new positions after the dust settles or new trends arise. But rising rates are not usually good for biotech companies that need funds.

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