Tempering, Tapering and Transition

A mild sell-off shifted momentum to the bears last week as countercurrents and seasonality comes into play. Heavy vacations in August transition to Labor Day weekend, Jewish holidays then a pick up in trading by mid-September. Here are several events to ponder:

  • Bond yields soared to 2.83 % up from the 1.6% level in early May. An improving economy means FED tapering is more likely in September. Many corporate bond funds are down 5% YTD, high yield bond funds are down 3%.
  • Gold is up $80 in 30 days to $1377 possible due to short covering and capitulation by major holders. Survey says traders are 84% bullish. Physical demand is up.
  • The S&P hit a wall last thursday so technical levels will be watched near the 1650 level at the 50 day moving average, highs for May and June. Many chartists are not worried seeing the sell-off as a correction in a bull market with no long term damage.
  • Weak earnings from Walmart, Cisco and others have brought in skeptics questioning rosy Q4 forecasts. Barrons has as its headline this week,“Beware Falling Profit Estimates”. In the Barron’s article sectors deemed safe bets are Health Care  Industrials and Technology while Consumer Disc,  Materials and Telecom are weak or underweight. For example they like Pfizer(PFE) and Danaher (DHR) and say avoid Tiffany (TIF) and Lennar (LEN).
  • And the hottest of the hot sectors biotech(IBB) is down 6% from early August highs of $201.47 to $187.84.
  • Is this just a summer vacation slump with a bit of profit taking or portent of further weakness through September?

Biotech Momentum Eases

Within the biotech sector we saw a few short term negative items beginning with weakness in Regeneron (REGN) due to missed earnings, an easing of momentum and 2013 tops for many stocks. Speculation reached its peak by the end of July and many mid-caps are getting hit with profit taking. Another touch of sobering news was a 10 pt. haircut for Onyx (ONXX $115.81) as Amgen (AMGN) wanted to see more clinical data on Kyprolis, a blood cancer treatment with data scheduled for European release in H1 2014. Many mid-cap stocks in the $2B+ market cap range have scanty financial underpinnings thus valuations may be stretched or are sentiment dependent. For example many mid-caps have doubled or even tripled in 2013 as big money seeks stocks outside the “top ten” hit list:  Aegerion (AEGR $89), Alnylam (ALNY$48.26),  Isis ($25.17), Pharmacyclics (PCYC $106.75), Santarus (SNTS $25.61), and Puma (PBYI $48.50). Still, Fidelity Select Biotech Fund (FBIOX $155) is up 46% YTD so no worries.

Next week should be quiet in the life sciences sector so look for clues on stock distribution. Investors have already moved on to Q4 positioning.

On Wednesday FED minutes from July will be published.

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