Large Caps Rule

Macro and Seasonal Risks Create a Choppy Market

The August biotech rally has taken us to the midpoint of the February top and May bottom and is faltering. Look at the XBI SPDR S&P biotech ETF (XBI), a proxy for momentum and smaller cap trading, up 8.7% over 30 days despite a downturn on August 15. The large cap weighted ETF First Trust NYSE Arca Biotech Index (FBT) is outperforming YTD up 26.5% and over the past five days is up 1% while the XBI is down 2%.  Over one year the FBT is still the leader. The Rayno Large Cap biotech portfolio is up 22.9% YTD and 44.6% over one year. The Four Star Fidelity Select Biotech Portfolio has been lagging ETFs in 2014 probably due to its size having grown to $8B as well as underperformance of its top ten picks. Smaller cap stocks are lagging in 2014 with iShares Russell 2000 Index (IWM) flat for the year at 115.36 with a double top in early March and in early July.

In summary:

  • The core position in any biotech portfolio should be FBT with an overweight of large cap biopharmaceuticals.
  • Traders should add XBI for momentum in a rally mode.
  • Add selected small and mid-cap stocks in near term for a Q4 rally.

Macro news has buffeted the market with concerns about Iraq/Syria, Ukraine and the FED. Nonetheless the S&P has hit new highs up 8% YTD because U.S. equities remain the top investment choice with low interest rates, good earnings and higher risks in Europe, SA and Japan. Forecasts for higher interest rates persist but have been pushed out well into 2015 and even 2016 so a yield on the Ten Year Treasury is unlikely to hit 3% near term. The labor market is still a concern for the FED. The healthcare sector (XLV) is the leader YTD followed by energy and technology.

Recently we have nibbled on a few small cap stocks from our 15% cash position expecting a fourth quarter rally.  They initially moved over 5% but have since retreated in a market dominated by traders. We will continue to select stocks that we think will benefit from a year end rally but until most traders and managers get back to work in September  it is hard to pick new stocks for a breakout.  Within our current Rayno Biopharma Portfolio our top small cap winners YTD are: Achillion (ACHN), Albany Molecular (AMRI) and Exact Sciences(EXAS). Recent picks for a Q4 rally are Celldex Therapeutics (CLDX) and Karyopharm therapeutics (KPTI).


P.S. On CNBC today Guy Adami, a CNBC contributor and trader was poking fun at Janet Yellen’s comment that biotech stocks may have stretched valuations but as we all know “biotech” is  a broad spectrum of companies and I am sure that FED Co-Chair Yellen was not referring to Biogen Idec nor Gilead but speculation in general.


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