What Happens When a Momentum Market Falters: XBI…Update-2

Look For Bottom in Biotech Today after 7-10% Correction from July Highs

Update-3… 8/12…Technical Bottom Hit in Biotechs-IBB Up 0.78% Near Close

Update-2…8/12…XBI Hits low of $225 today and bounces back-down 10.4% over 5 days. Look for bottom in XBI today but speculative model of small cap portfolio may be broken.

  • Three Rayno Biopharma stocks are green today; ARRY, FCSC, GLYC.
  • IBB also recovering down about 1% but extremely volatile.
  • Many “high flier” speculative mid-cap biotech stocks are broken.
  • Need large caps to go green: ABBV,GILD,REGN.
  • The XLV healthcare ETF is still negative
  • Global Blood Therapeutics, Inc. (GBT) IPO soars 100% from $20 to $40; has aPhase 1/2 drug candidate for sickle cell disease (SCD). Competitor to BLUE.

Update-1… 8/11 1:30 EDT  Sector Reversal From Yesterday

8/12…12:11 am EDT… Futures Down on Yuan Drop Second Day

S&P NASDAQ DOW Futures Down ~0.67%

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Devaluation of Yuan Brings Market Down

China cut its daily currency reference rate by 1.9% hurting companies exporting to China like luxury good sellers and miners and boosted shares of China exporters such as clothes and toy sellers. In the US market only the utility sector was green and the S&P was down 1.23%. The sell-off reversed winners of yesterday with Materials down 2.94%, Industrials down 1.54% and energy down 1.34%. AAPL is down 4.74% over concern with exposure to China.

Healthcare stocks were down 1.15% showing they are no longer immune to macro events. The biotech screen was red reflecting loss of momentum and a dearth of speculators. The volatile small cap XBI is down 2.7% and 8.68% over 5 days.The IBB and large cap biopharmaceutical stocks is more stable down 1.62%.

The money today has moved to the safe haven of US Treasuries with the TLT up 1.53% to 124.69. The Ten Year Yield has moved down to 2.14%

One Rayno Small Cap Pick GlycoMimetics Inc. (GLYC) is up 2.39% on low volume. GlycoMimetics has two drugs in development leveraging its carbohydrate biology, GMI-1070 in Phase 2 for Vaso-occlusive crisis and GMI-1271 for AML.

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8/10

Broad Rally Breaks 7 Day Slump Led By Energy, Industrials and Materials

But Momentum in Biotech is Broken

Momentum stocks are being sold after huge gains year to date. Lock-ups are expiring and the sentiment has shifted as even good earnings news somehow disappoints. No it is not a bear market in biotech just the second big sell-off of the year as biotech focused institutions rake in big gains. With NASDAQ stocks also weak it is hard for biotech to rally.Today the sector is up but off highs hit near the opening. The XBI is the trade to watch down 6.5% over 5 days but still up 28% YTD.

The April correction (IBB) took us down about 9% and we are now down about 7.7% (IBB at 368.67) from July highs after correcting 9% at Friday’s low. Vicious sell-offs occur even in a  bull market. Other than the usual weak seasonality a constellation of events has changed the sentiment:

  • Disappointing earnings from Biogen (BIIB) and a little too much hype on their Alzheimer’s disease drug in Phase 2 development.
  • A shift and possible rebalancing of portfolios out of healthcare (XLV) a sector leader into cash, financials or economically sensitive stocks.
  • Concerns about multi-$B cap valuations on newly public stocks with limited late stage pipelines.
  • Big hits on AAPL stock and the sell-off in big media stocks caused by the disruption of cable unbundling.
  • Concerns about possible FED rate hike and what it means for the market. If dollar remains strong multinational shares will remain weak.
  • Disinflation in energy and concerns about China growth.

Leading the downdraft on Friday were momentum stocks in hot new technologies such as cellular therapy, CAR-T and immune-oncology, all promising breakthrough  technologies in molecular medicine but early in the clinical development pipeline.

To really appreciate the volatility during this current correction look at bluebird bio Inc. (BLUE) down as much as 11% for the day to $137.5 after hitting a high of $194 on June 1. The stock was $167 on August 5. bluebird bio is a high profile, clinical stage biopharmaceutical Company focused in gene therapies for severe genetic and rare diseases. There are three key products in the pipeline but much of the excitement is about their LentiGlobin Beta-thalassemia product candidate in Phase 2/3.

Despite the rally in biotech stocks today we remain cautious near term until the summer churning runs its course. Hold onto core positions and look forward to a strong year-end rally.  But momentum for traders looks broken.

 

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