Update for the Week: Trying to Find the Bottom-Choppy Action But Tradeable
- XBI holds above $74.62 bottom up 1.3% for the week but can’t hold today’s gains.
- AMGN flat for the week at $193 but can’t hold gains at mid-week.
- Big winner TSRO up 64.9% for week now at $43.
- Tape looking better with more green that red.
- QQQ down 5.2% for the week!
Update At Close: Sell-Off Continues...S&P Down 1.66%, NASDAQ Down 3%
- IBB down 2.14%, XBI Down 3.28% to $76.91 on Red Screen Day.
- Added AMGN at $194 closed at $194.91.
- New Long Trades: TSRO Up 5.35% at $36.83, XBI holding above 11/14 low of $74.32, ABBV down 2.24% to $89.48 above recent new buy under $84.
- XLV down 1.27% to $90.87.
Trade the Seasonal Rally for Biotech: Risk/Reward Looks Favorable
Hold Large caps, trade Mid and Small caps
Risk still tethered to macro issues and drug pricing for now
XLV Holding Up Nicely Up 9.2% YTD
The risk/reward set-up looks favorable for a seasonal rally in biotech assuming no further technical damage in the NASDAQ index (QQQ). Over the past two months we have chronicled the volatility in biotech stocks buffeted by earnings and major macro concerns. We do not have a clear picture of the life science market because the news cycle has weighted macro issues such as trade and tariffs with China, the mid-term elections, the FED and global growth. Prospects for a China/Us trade deal bear term has dimmed.Momentum has left biotech stocks as investors’ perception of market risk has increased with the recent turmoil. Moreover breakthrough news such as M&A and clinical trial results has not excited investors since the ASCO Meeting in June.
Here is a brief timeline of the vicious sell-off as we posted in October:
- October 4 Biotech sell-off began in earnest with mid-cap and XBI weakness.
- October 10 Momentum lost as Macro issues dominate.
- October 15-30 Posts on free-fall to Bear market. 10/23 fake-out rally with no f/u.
- November 4 A bottoming process so look at new positions for very tight trades.
As the sell off picked up in mid-October, we trimmed many positions in biotech and suspended our Biopharma portfolio. Small and mid-caps are still attractive for traders. We added back some ABBV in low 80s and hold BMY, GILD and RHHBY as well as several small caps. Monitor the IJR and XBI for technical trends.
For risk averse investors have a look at Amgen (AMGN) at $194 one of our original Portfolio picks on 9/16 at $172; Amgen has a Fwd PE of 13.36, a P/S of 5.38 and a Div. of 2.72%. The stock is up 9.7% YTD and off its highs of $208. AMGN should outperform the IBB.
Large cap earnings were good but slowing YoY top line revenue growth is a coincern.The MO driven small cap XBI is now down 10.3% YTD and the large cap IBB off 4.55% after hitting highs as late as 8/31. We briefly exceeded 2015 highs in 2018 with the FBT and XBI but the IBB stalled below these highs illustrating the revenue growth concerns of large caps. Nonetheless large caps such as Merck (MRK) and Vertex (VRTX) are outperforming in 2018.
Without financial or fundamental news to drive life science stocks we need to follow technicals because the current prices should reflect all that is known with the market now that earnings are reported. Assuming no bad economic news hits the market overall we are at attractive levels for new buys solely on technical analysis if you believe in the underlying strength of the healthcare sector.
- Overall perception that the healthcare sector (XLV) will be strong in 2019 because of no new pricing legislation nor ACA cutbacks and continuing patient demand for services.
- Good price points for entry at 2018 lows and positive seasonality for year-end news and clinical meetings such as ASH.
- Momentum can come back to biotech when the macro clouds lift as is shown on rally days with good volume. Track NASDAQ performance for risk.
- Q4 and early Q1 are pivotal for Company deal announcements and Conference News
- Breakthrough technologies such as gene editing, gene therapy and RNAi offer sentiment-shifting potential with positive news.
Disclosure: long ABBV,BMY, GILD,MRK,RHHBY,XLV; trading TSRO XBI several small caps.
We will update this post as market risk evolves particularly a break in the QQQ or XBI.