Bull Market Intact But Sentiment Has Turned Negative

The severe 20%++ correction in the biotech sector is getting a lot of bearish commentary particularly after the Hillary “price gouging” tweet. Here are the Five Trends in Biotech we covered  from past posts. From the five key biotech bull market trends only one indicator is open for analysis, the Q3 earnings of the top growth companies. The other four trends have turned negative but seasonality is bullish for November and December.

  • Momentum is broken. The high flier “immuno-oncology” and “rare-disease” drugs have been crushed. Many of them peaked in July and are down 50% or more e.g. BLUE CLDX ESPR KPTI PBYI etc. However good news still does drive stocks higher so that is encouraging. Spark Therapeutics, Inc.(ONCE), an early stage gene therapy compan,y will offer a good test case with top-line SPK-RPE65 Phase 3 results next month for retinal dystrophies.
  • Technicals are one of the most important indicators going forward. Earnings will be important for larger caps but smaller caps trade on retail enthusiasm and institutional buying. Holding the recent August bottom for the small cap XBI and larger cap IBB should give us buy and hold indicators. Over the past month the XBI has outperformed the IBB by about 5%. We have two reversals in the upward recovery channel in September.
  • Large and Mid-Cap biotech Q3 earnings. Many of the favored large caps stocks are now negative for the year because they are most sensitive to earnings and this is now exacerbated by the pricing issue although it is longer term. The Rayno Large Cap Portfolio is down 1.85% YTD but GILD and REGN are up YTD.
  • The IPO Market is down to a trickle with many stocks trading under their IPO price. This reflects higher risk for companies that have no product sales and will need to raise more money. However Regenxbio, Inc. (RGNX) went public on 9/16, was a hot issue soaring 38.4% on day one and now is still up $4.43 over its offering price of $22.
  • Our biggest concern is the loss of healthcare leadership in the sector. The XLV has hit lows not seen since early February and is now flat YTD. During many down sessions in the market in 2015, during macroeconomic crisis like Greece, healthcare has held up as a defensive investment but not any more.
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