Biotech Rally Is Stalled But Tape Action Is Lively

It has been a directionless choppy week of trading with a very bearish sentiment and a few market strategists calling for a tough year ahead because of lackluster revenue growth. The energy sector has led the way down as oil tanked below $40, nat gas futures hit the $2 level bringing big concerns to the high yield bond market. As Mohamed El-Erian stated today in a CNBC Squawk Box interview that he was wary of the current investing climate because of what he calls “unhinged markets” in three areas: commodities, emerging market currencies and high yield bonds.The market took off late in the day but sold off just as quickly holding on to modest gains. NASDAQ-100 was the leader up 0.68%.

The biotech rally recently fizzled when hit by profit taking and some adverse clinical trial news reminding investors of the risk on still pricey mid-cap companies without revenues. But the move today could give patient investors hope for the seasonal biotech rally despite the overhang of pricing concerns, congressional challenges to the Affordable Care Act (ACA) and rising healthcare costs. Moreover consumers are footing more of the healthcare bill potentially curbing demand. The major biotech ETFs are barely holding above the SMA 50 level and pulled back from the upward trend last week. Year to date technology is a leading sector. Here are the numbers:

IBB 329 up 1.29%

XBI 68.13 up 1.04%

XLV 71.38 up 0.79%

QQQ 113.40 up 0.45%

For most of the year the IBB soared above the QQQ until peaking this summer when it was up over 30%. Now the QQQ is up 9.83% YTD and the IBB up 8.58%. So the safe position in a volatile 2015 was the PowerShares QQQ Nasdaq-100 giving you high growth technology and consumer names with some large cap biotech positions like Gilead Sciences (GILD). If you are looking for larger cap growth stocks with less biotech allocation the QQQs may be the play.

There was strong demand for several fallen mid-cap story stocks today: Anacor Pharmaceuticals (ANAC) up 8.6%, Agios (AGIO) up 4.45%, bluebird bio (BLUE) up 9.23%, Spark Therapeutics (ONCE) up 9.02% BUT Puma Biotechnology (PBYI) fell 11% on Interim Phase II breast cancer results for PB 272 neratinib.

Rayno Large Caps held firm in the green except our biggest winner YTD Regeneron (REGN) was flat lined. Rayno mid-caps were mixed with Seattle Genetics (SGEN) up 1.5%.

Many of our new small cap picks were hot in November but have abruptly sold off. We need to have momentum return to smaller cap names and the XBI to get out of this recovery phase of a bear market which started in September. Remember that small cap biotechs outperformed YTD but are way off July/August highs.

The Dx and Tools sector got a lift from a CNBC story on Illumina (ILMN) up over 2% today and one of our top picks two years ago. The availability of full genome sequencing for individuals provides a better understanding of genetic risks but not yet for actual clinical diagnosis.

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Summary

1. Stay patient with core biotech holdings until the recovery trend is confirmed. Diversify holdings with large and small caps as well as ETFs like IBB and XBI. Have a 20% cash position for future trades.
2. The healthcare sector needs to show market leadership to escape the current negative mindset. Despite all the issues clouding the healthcare sector it offers relative safety from macro events in 2016 with upside from innovative new products and M&A.
3. The manic momentum phase of the biotech bull market is over. Many generalist funds will be cautious on speculative stocks but the recent strong tape action is bullish near term.Specialty life science funds have huge returns over the past five years and have money to be put to work.