Update-1 2/23…A Wild Ride Down and Up!
Stocks took a tumble then came back to the green but many speculative small caps stayed down. Our speculative small cap index fell from119 to 115. The ARKK funds got hit hard. We will try to review what happened tomorrow. Assume for now that playing the momentum game may not be so easy. Start by looking for new buys with defensive healthcare plays like the XLV ending flat today at $113.95 and up 7.68% YTD. Also look at new buys in large cap Biopharma which have corrected slightly: ABBV, BMY, REGN, and VRTX. Use options to lower risk. In COVID plays HOLX and QDEL went green.
IBB down 1.4%, IWC down 2.45%, QQQ down 0.3%, XBI down 2.24%
Stealth Correction in Biotech and Healthcare Stocks?
We looked across the screen in various sub-sectors of biotech and healthcare stocks in light of last 2 weeks selloff in healthcare and Friday’s weak showing in many coronavirus diagnostics plays. Moreover the XBI is the quintessential bull ETF and it is now 15 points off its February 9 peak of $173 to $159 but still up 13% YTD. This is hardly a correction just shaving off some frothiness. The selling over the past 2 weeks has been steady and many technical indicators like the MACD are negative. The XBI is a momentum indicator for biotech and we would expect it to hold near theJanuary highs at the $150 level.So for now this stealth correction appears to be profit taking by traders but the XBi was hit hardest,
But there is Still Speculative Appetite
We have written that speculation in smaller stocks has continued despite the recent weakness. Our own portfolio of speculative small cap stocks is still only 1% off recent one year highs-mark this index at 119. Many of our long term picks are volatile but still very strong like Genmark (GNMK), Glaukos (GKOS) and Teledoc (TDOC). And we sold Pacific Biosciences (PACB) too soon. Even the iShares Microcap (IWC) is near its peak of $155 with neutral technicals. We also covered Vir Biotechnology (VIR) which still has strong momentum and is near its highs,
Coronavirus Diagnostics Testing Model in Flux?
On the other hand coronavirus stocks especially COVID diagnostics are selling off as valuations catapulted beyond recent fundamentals. Revenue and earnings growth have exceeded expectations but the inevitable profit taking has begun on Friday following earning reports and analysts comments:
Genmark (GNMK) down 4.52%, Hologic (HOLX) down 8.07% and Quidel (QDEL) down 13.09%. Quidel was at one time last August at $302 now is at $182.59. Quidel is a great Company with phenomenal growth of 432% in Q4 but investors are looking into a post pandemic testing scenario where the testing models will change as more people get vaccinated and COVID cases decline. There are also issues on testing platforms such as molecular test compared to rapid tests. A recent article in the Wall Street Journal mentioned that 32 million Abbott Labs BinaxNow rapid tests bought by the U.S. Government have gone unused. ABT was down last week a little off its recent highs.Since many companies’ kits for COVID Testing kits are under Emergency Use Authorization (EUA) by FDA you may not know which test will get the full approval with updated performance parameters.And crushed in the fray was Orasure Technologies (OSUR) down 10.9% to $11.43.
Healthcare Sector is Flat to Weak After Sector Rotation
There has been in recent weeks a rotation into Energy (XLE) and Financial (XLF), new high at $32.41, stocks and out of healthcare (XLV). The trend actually began in early November . We have tracked the healthcare sector in our posts since early October. The XLV took a hit in late January and has been flat in February with weak technicals in February.
Disclosure long: ABT, EDIT, GNMK, GKOS, HOLX,TDOC, and many large cap biopharmas.
What to look for in coming weeks in a weak market:
- IBB holding January gains at $160 level. Large caps sold off and remain defensive play because of stable growth and dividends. XPH holding .Mid -cap biopharma should remain strong for innovation e.g.vaccines, and M&A potential.
- Small cap strength is key to a biotech bull market. The IJR, IWM and our own speculative positions remain strong.
- An emerging technology area for future breakthroughs has been Gene Therapy. Our favorite stocks are CRSP, EDIT, NTLA. Many other stocks in this group have sold off and are near their lows.
- Commodity and financial stocks led the way last week as rising interest rates and potential inflation dominated the narrative,
- innovation from the life sciences has been a driving force in this market.