Are Biotech Stocks Nearing Exhaustion… Again?

In early April I wrote a piece arguing that biotech stocks – using the iShares Nasdaq Biotech ETF (IBB) as a proxy – looked to be under distribution. At the time the IBB traded at approximately $340. My argument rested on negative divergences in the Shares Outstanding / Price action of the IBB, Block Money Flow trends, an increase in volatility, and various DeMark indicators.

Here is how these “tells” have evolved since:

  • Shares Outstanding have continued to increase, up about 2% as the ETF’s price has recovered about 5%, and is back near its old highs;
  • Over the last couple of weeks block money flow has been highly supportive of the recent price recovery;
  • IBB’s Volatility has settled at the higher levels set back in April – at about 24%
  • The Demark Risk Levels (i.e. area of secondary upside exhaustion) noted in April have held and on May 29 the IBB printed a fresh weekly Sequential Countdown Sell, with the associated Risk Level at $404.61. There is a weekly TD Propulsion Exhaustion Up target at $372 that has not yet been satisfied. On a daily basis, the price is on bar 7 of developing Countdown Sell.

In sum: the IBB has worked its way back to the secondary exhaustion areas noted back in April. I’m not inclined to give it slack to the new Risk Level at $404, so $368-372 remains my “uncle” area. Not a “good thing” if someone shorted the ETF back at $340 as I did. It’s a good thing if someone waited for a return to the “risk levels” before shorting because it now offers a very tight stop nearby. The Money Flow and “Shares Outstanding” divergences have resolved themselves for the better. I remain of the view that in the aggregate biotech stocks are a better “sell” than not, even though so far price has proven me wrong.

At the same time, I am sticking with the individual stock “longs” that I noted in the article. And I would offer the following in that regard:

  • Seattle Genetics (SGEN) is up about 30% and for my money is begging to be hedged with long dated (Jan 2016) “collars”;
  • Biomarin (BMRN) has Ph. 2 in BMN111 coming before the end of the month; in my opinion it will be a significant catalyst for the stock price either way; an even bigger – almost binary event (for the stock, NOT for the company) arrives in the fall in the form of the Drisapersen AdCom meeting;
  • The lousy response to Medivation (MDVN) breast cancer data (at least that’s what I see as the reason for the recent drop) is a good opportunity to add to what had become a tiny position;
  • Vertex Pharma (VRTX) looks in limbo for a while and covered call sales, “collars” is how I’m playing the trading range;
  • Esperion (ESPR) just won’t come back to where I’d like to buy it ($80’ish) and I am not chasing it.

Thanks for reading.

 

Twitter:  @FZucchi

Author holds positions as mentioned in the article in IBB, VRTX, BMRN, MDVN, SGEN at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

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