Look For The Q4 Biotech Bounce In Mid-Small Caps

Look for the Q4 Biotech Bounce led by Mid-Small Caps

  • Don’t get ebullient on any 1-2 day rally, choppiness still lies ahead.
  • Trades are harder when momentum is gone; speculation has ebbed.
  • Still need small and mid-caps to gain strength for biotech performance.

A brief recap of our minimalist playbook for 2021 was to overweight the XLV up 15.49% over six months with an IBB up 9.5% over six months, position according to your risk level. Yet both ETFs are lagging in September tracking the bottom of their upward channel. Here is the Model Portfolio as we last updated in August. Track these two ETFs and it will help you navigate this skidggety period of market fatigue. Healthcare usually outperforms in a volatile market unless there is a direct policy impact news like drug pricing legislation. Large-cap biopharma stocks are off their highs because of prospects that drug prices may be directly negotiated through Medicare but several Democrats are not in agreement as to how this could be best accomplished. We still hold large caps as core positions: REGN, RHHBY, ABBV, GILD, etc.

M&A is down in 2021. We need innovation news and dealmaking to get a biotech bounce. We would favor Mid and small caps for Q4 and 2021because these stocks will have news. New capital is flowing into life science funds, $30B in 2020 and $21.8 B through August.

Sector Rotation Trade Is Not So Easy

The so-called “re-opening trade” has been a more difficult strategy because the “peaking ” of the delta variant is still uncertain and may indeed require boosters and annual vaccinations. Over the past six months, the cyclical and re-opening stocks have underperformed the S&P 500: SPY up 13.7%, XLI up 5.52%, XLP Staples up 8.8%, XLF Financials up 8.9%. Only the XLK Technology up 20%, and SMH semiconductors up 19.3% has outperformed. Investors want growth until the economic picture gets clarified, so maybe after the Q3 earnings call.

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Disclosure: None.

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