So, what to make of the recent fall of the biotechs? Is it all over for them? Was it just another overblown fad? Fear is everywhere it seems, so what about the overall stock market and how it will respond?
As usual, we ask the market to tell its story… One the eve of the baby-boomers reaching an age where products like ‘First Alert’ and stair-lifts start looking attractive, the world has decided to dump biotech stocks, companies with the promise of game-changing medicines and technologies that theoretically borderline immortality. Go figure.
So is this set to be a biotech bloodbath or a biotech bounce?
First, here’s the picture that summarizes the alarm out there currently- the proxy for biotech stocks, IBB:
Over the last two weeks we’ve seen that fall unfold. IBB crashed through its 50 day average price line (blue line) after some anti-business politicians queried profit margins in Gilead Sciences. Perhaps Gilead hadn’t made enough ‘political contributions’. Anyway, that triggered a chain reaction of selling, and the result is above. The S+P and Dow have barely a dent in them because of this, and even the Nasdaq (the index of most biotechs) isn’t faring that badly.
What we’re seeing now is, perhaps, IBB leveling off on the longer term 200-day average price line (red line). The test will be to see if IBB holds above that, consolidates, and then rises back up. To get a clue of what the outcome may be here, let’s turn to the longer term ‘weekly’ chart of IBB:
As you can see, IBB is in the steady uptrend I tipped you off about in this column on September 17 last year- it’s risen from $210 then to $280 when it peaked in February.
The blue line is the 30 week average price line and it’s pointed UP, and IBB has stayed above it. As you can see though, IBB is currently touching it, so this is an important inflection point. Is this just a correction in a steady uptrend or something deeper? We should know this week, but when a long term price average has such upwards momentum like that, it’s hard for the price to crash too far below it for too long. Anything can happen, but chances favor a bounce.
As I’ve said many times before, the bull never makes life easy for you. He likes to shake out the dumb money that’s late to the party with regular sell-offs like this, and this sell-off has possibly served up a feast of low-downside opportunities in the biotech space, a sector that is set to explode in the years ahead. When cab drivers and shoe-shiners in Main Street start giving me biotech stock tips, maybe that’s when I’ll start getting worried, but currently I doubt either of those guys even know what biotech means.
Best,
Jim.
