MegaCap Tech Stocks Take a Big Hit-Volatility Rising in a Sector Shift

Market Rotation Supports Overall Market-S&P 500 Stable today up 17% YTD

Sluggish Biotech Now Just a Market Performer With IBB up 17% YTD

The booming tech sector sold off today with the XLK down over 2%. Harder hit were the 2017 high fliers such as the FAANG stocks: FB AAPL AMZN NFLX and GOOG all down over 3%. Undoubtedly some big funds and robots were taking profits and an imbalance of trades roiled the market in the early am. The red hot semiconductor sector also took a big hit with the Van Eck Vector ETF (SMH) down over 4%, but it is up over 40% YTD. Nvidia (NVDA) is down 6.78% today but up 84% YTD! NASDAQ was down 1.4%. Today’s divergence could be signaling a major sector shift into laggard sectors or capital intensive companies more sensitive to tax cuts and the Trump legislative agenda.

Then there is the Bitcoin side show with a break beyond the 11,000 mark a 13% move in one day before a sell-off. Plans are underway to allow investors to bet on NASDAQ Bitcoin futures while others have called for more regulation.

Both the biotech and healthcare sectors have been weak since the mid-October earnings release causing concerns about top line growth. Today the biotech sector tried to rally but with NASDAQ down they lost traction and were off their daily highs.

IBB iShares Nasdaq Biotechnology ETF daily Stock Chart

Maybe this is a major pivot point for a sector shift particularly with momentum driven large cap tech stocks but take a look back into factors that have been driving biotechnology stocks in 2017. Biotech peaked in July 2015, had a vicious sell-off then tried to regain that high until mid-October 2017. It may be hard to regain that bullish sentiment. In the meantime the broader based Healthcare SPDR (XLV) is up 20% and holding the trend line.

Here are some of the key factors that are undoubtedly holding back the biotech sector:

  1. Rotation into More Timely Sectors: no doubt the money flows have shifted to technology and lately financials. The FED has reiterated a rate hike in which drives financials higher. Bitcoin may also be a distraction for buyers. Without a doubt, the volatility of the Bitcoin market is captured perfectly in these Bitcoin Statistics in 2020.
  2. Macro News Curbs Sentiment: drug pricing is always in the news particularly during Trump tweets and this has hurt sentiment.The new HHS nominee Alex Azar has stated drug pricing issues as his top priority so expect this political concern to be played out in the media.
  3. Slow News Cycle in Biotech: clinical news always moves biotech stocks and this year is no exception. But although the immuno-oncology new product rollout continues the blockbuster oncology theme may be getting old. Some near term catalysts are biotech stocks that are awaiting FDA approval in December and emerging technology plays such as CAR-T and gene editing milestones.
  4. M&A Lagging: big deals are lagging since Gilead Sciences (GILD) acquired CAR-T lead Kite Pharma. M&A deals are likely to continue and drive the market in 2018 as large cap biopharma seeks pipeline renewal.
  5. Slower Growth in revenues: large cap biopharmaceutical earnings were mixed and the Russell 2000 (IWM) was up 11.55% over 3 months. This is reflected in more active trading in biotech small caps with news and deal expectations thus the equal weighted smaller cap XBI should be a lead indicator.

Until we get a better trend line on technicals and the near term legislative actions such as tax reform, ACA repeal and reform and Medicaid reimbursements, the biotech sector is a hold. This means buying ETFs may not support your portfolio because it is becoming a stock pickers market. Can actively managed funds outperform the ETFs in 2018? However the XBI is still a good indicator of sector direction. Our portfolio is a hold with one new buy Celgene (CELG) at around $102.

Disclosure : long ABBV, BMY, CELG,FBIOX,GILD, RHHBY and several small caps.

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