Party On, Biotech!

 | Aug 14, 2014 | 12:18 PM EDT
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You can always tell when you are going to have a group move that's boosted by exchange-traded funds. It's when one of the largest players in the ETF has really bad news yet it doesn't matter anyway and the stock goes higher.

This morning Amgen (AMGN) reported a major disappointment in a multiple myeloma trial of Kyprolis, a key drug and the most important reason why the company paid a $10.4 billion fortune for Onyx Pharmaceuticals last year. Kyprolis has had real success with other kinds of cancers, but this is a major setback because when we first heard of the trial, it drove down the stock of competitor Celgene (CELG), which has the top multiple myeloma franchise in Revlimid. I have been following the test and while, of course, you want it to succeed, I knew it would hurt Celgene's stock.

So when I saw the failure, I knew the stock would be hammered. And it was -- for all of about 3 points in premarket trading.

Sure enough, though, it started climbing and then next thing you know it is off to the races.

Why? Because it is a huge portion of a host of biotech ETFs, and they are all breaking out. They are breaking out because when you see low consumer spending at Wal-Mart (WMT), where 100 million shoppers go each week, you know that there's not going to be a lot of inflation. That's right, the weak numbers of Wal-Mart in this tape inspire biotech buying, which moves up all of the biotech stocks in lockstep because the big hedge funds don't want to own the "wrong" one.

So, the ETFs make every one of these right.

Now, this is all a group move, not an individual move. We know that because Celgene's up less than Amgen as it is less heavily weighted in the ETFs.

Of course, this is pure insanity from a stock picker's point of view, but it is the way of the world right now and it explains why it is so hard not to like this market. Think of it this way: If you own the biotech with the worst piece of news and it goes higher, what happens when you get great news?

These things are all happening because the economy is slow. They always seem counterintuitive because people somehow, even after all of these years, equate a strong economy with higher stock prices. You need to equate a strong economy with one set of stocks and a decelerating economy with another set, namely stocks like those in the biotech index.

It's another oddity of this market, and it's an oddity that can be played even if at this very moment the trade is to sell or short Amgen and go LONG Celgene, because when analysts actually sit down with pen and paper over the weekend, they will realize that this is phenomenal news for Celgene and terrible news for Amgen.

For right now, though? The economy's cooling -- party on, biotech!

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