Biotech Bull Market Under Pressure: Now Flat To Down In 2018

Biotech Bull Market Takes A Hit: Considerable Technical Damage

Remain Cautious Through Q3 Earnings Cycle

Here are some positive and negative indicators to consider on the future direction of biotechnology stocks. We are approaching positive seasonality for the life science sector so we should see a rally after the election through mid-January. Specialist funds control much of the action so we may have to wait for their cue.

  1. NASDAQ and QQQ. Biotech stocks correlate with NASDAQ strength so if tech stocks are weak biotech usually follows.The QQQ is still up 8.6% YTD but has lost 5% over one month.
  2. Technicals in a Downtrend: The large cap weighted (IBB) reached a peak momentum high in July 2015. The smaller cap weighted XBI hit $90 during that time frame but then rallied to new highs around $100 in early July before selling off 15% to the $85 level.The XBI is now negative YTD while the IBB is flat. The XBI was the ETF leader but has followed the recent downtrend in tech and small caps with the iShares S&P Small Cap (IJR) down over 10% since late August. source link A countertrend move up in IJR, IWM and XBI is needed for a buy signal.
  3. The FBT is the leading life science ETF up 12.2% YTD because of better stock selection. However the FBT peaked on 9/27/18 so it is a good indicator of sector strength.
  4. Our recent pick Tesaro (TSRO) is holding up nicely at the $41 level. We added TSRO to the Rayno Biopharma Portfolio at the $34 level.
  5. Large caps are not holding up well lately so Q3 revenue and earnings growth loom big. Best performance off 52 week highs are (in order) MRK, VRTX and AMGN. Stocks near lows are: ABBV, CELG. Best to hold off new buys until we get earnings reports. Gilead Sciences (GILD) is a safer play at $72-73 with a 3.1% dividend.
  6. Macro news has scared investors particularly with trade policy and tariffs. The China trade war can inflict considerable damage to global growth depending on the outcome.
  7. M&A and clinical breakthroughs offer huge rally potential if the overhang to the market is reduced. This would require positive earnings reports, better technicals and no negative geopolitical events especially with regard to China.
  8. Although small cap speculation has been curbed with big losses since early July investors  are still very active and will jump in with the compelling news. Examples Cannabis theme stocks CGC, NBEV, GWPH.
  9. Mid-Caps are sluggish and valuations are too high-needs a major deal to spark interest. Gene editing stocks are weak CRSP, EDIT, NTLA.
  10. The Fidelity Select Biotechnology Fund (FBIOX) a large cap fund is up only 3.4% YTD and is in a major downtrend with multiple tops in 2018.
  11. The healthcare sector (XLV) is down 6% from its October 1 peak raising big concerns.
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