It’s no secret that the U.S. stock market has been downright boring lately. Yes, I said it. Boring.
On Friday, the Dow Jones Industrial Average tested below the 18,000 level — a hurdle it first cleared back in December.
It’s been five months of listlessness for the U.S. stock market as a bevy of concerns weigh on the bulls from the specter of Federal Reserve interest rate hikes to the situation in Greece and ongoing disappointment with the economic data.
The tech-heavy Nasdaq Composite has done a bit better, but has slowed its push higher to incremental new highs since the surge in late February and is testing resistance from its late April high.
The action has been elsewhere; in Chinese stocks for instance, up roughly 70% since December. Biotech stocks have also been red hot, with the iShares Nasdaq Biotechnology ETF (IBB) up about 20% over this time.
But the bulls have a problem here as the IBB stalls out at triple-top resistance near $370 — a level first hit in mid-March. Is a breakout likely? Or are we set to fall back to support near $340?
Valuations are trying, to be sure. Nearly 75% of the biotech stocks in the Nasdaq Biotech Index aren’t profitable. And the earnings that are made are largely the work of just five companies: Gilead Sciences (GILD), Amgen (AMGN), Shire (SHPG), Biogen (BIIB) and Celgene Corp. (CELG). As a result, the index carries a price-to-earnings ratio near 50 versus the 15 that’s considered fair value on the S&P 500.
Biotech stocks are a step up from lottery tickets: Fortunes made and lost on the clinical results and regulatory approval. Yet smart traders need to go where the action is, where the billows of smoke from afar reveal a fire of speculative excitement. Just because something is expensive doesn’t mean it can’t get even more expensive.
Right now, I’m putting the short-term prognosis at a 60% chance of a breakdown, versus a breakout.
A big catalyst will be the American Society of Clinical Oncology’s annual meeting in Chicago, and it often produces news that moves individual biotech stocks in the discipline.
The biotech industry holds a variety of important conferences during the year where scientists and companies present their latest molecules, discoveries, therapies and big thoughts.
Historically, anticipation of the ASCO meeting has been an important driver for the share prices of presenting firms who showcase their latest disclosable research data. This is particularly true for the small-cap and mid-cap biotechs whose future fortune in oncology can be made or broken by what happens at ASCO.
Keep an eye on GILD, PCYC, TRTX, CYTR, BMY and MRK, most of which are in the major exchange traded funds such as First Trust Health Care AlphaDex Fund (FXH) and the Health Care Select Sector SPDR Fund (XLV).
Research: Anthony Mirhaydari
Jon Markman writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with the VIX. Check out his Top Stock for 2015 here.
