If you managed to avoid the poor action last week, you probably ended up suffering some hits today. The indices made it look like it was a fairly good day, but under the surface many of the leading speculative names saw heavy selling. Biotechnology was particularly hard hit due to comments by Hillary Clinton about price controls for drugs. Small biotechnology stocks were the best group in the market last week. Today they were slaughtered.
While there will be some bullish headlines due to the fact that the DJIA finished up 125 points, it was a very deceptive day. Momentum stocks were mixed with things like Fitbit (FIT), GoPro (GPRO), Amabarella (AMBA) and most biotechnology names getting hit. That was offset to some degree with strength in Google (GOOGL), Amazon (AMZN) and Tesla (TSLA), but it was not a convincing show of strength. The Nasdaq actually had negative breadth and small-caps lagged badly. (Google is part of TheStreet's Action Alerts PLUS portfolio. Amazon is part of the Growth Seeker portfolio.)
Regardless of whether you are looking at the indices or the underlying action, the big picture remains problematic. We are still in the middle of the trading range that has been in place since mid-August, and the action today did nothing to change it. In fact, the poor action under the surface more than offset the strength in the senior indices.
It was disappointing to see the biotechnology sector succumb to political posturing, but let's hope the pullbacks give us another chance at some trades.
This market is random and sloppy right now. It makes for challenging trading, but it is the sort of action we need periodically and the markets will eventually be healthier for it.
Have a good evening. I'll see you tomorrow.
Sept. 21, 2015 | 12:46 PM EDT
Biotechs Have Turned Into a Bloodbath
- · Clinton's comments on price controls cause problems.
The senior indices are green and breadth is still quite strong, but it has turned into one of those days where the action under the surface is presenting some major problems.
The biggest issue is in the biotechnology sector. This group had great relative strength last week but has turned hard today on talk from Hillary Clinton about imposing price controls on drug companies. This was prompted in part by Turing Pharmaceuticals, which acquired a 62-year-old drug and is moving to raise the price from $13.50 to $750 per pill.
Biotechnology stocks have been the best speculative group lately, but they have turned into a bloodbath. It is causing a surge in negative sentiment to have the group reverse so hard. The money is rotating to other sectors and holding the indices up, but this sort of shift has a tendency to eventually infect other speculative groups. We have already had an issue with leadership, and this just makes it worse.
I've taken quite a few stops and have moved to the sidelines on many small biotechnology names. I don't see anyplace to redeploy that capital right now, so I'll stand on the sidelines. This is not the sort of action that bodes well for a quick market recovery.
Sept. 21, 2015 | 10:23 AM EDT
Good Start, but Chasing Strength Gets Tricky
- · If early lows don't hold, the bears are going to push.
We have a mild positive start on better than 2-to-1 breadth, but momentum is muted and I'm watching to see if the lows of the day hold. In the new market that has emerged since the August breakdown, chasing strength has been much more problematic. The contrarians who fade this sort of action have had much more success lately, and that is a theme we have to watch.
If early lows don't hold, the bears are going to push. Keep an eye on Google (GOOGL) as an indicator. It has a big target increase from JMP Securities this morning. If that fails to stay positive, it will tell us something about the resolve of buyers. (Google is part of TheStreet's Action Alerts PLUS portfolio.)
Some of the biotechs on my screens continue to act well. There is some chatter about high drug prices being a campaign issue that we have to monitor, but so far the group continues to offer the best opportunities.
Some names on my radar screen this morning include Inotek Pharmaceuticals (ITEK), Cross Country Healthcare (CCRN), TherapeuticsMD (TXMD) and Lion Biotechnologies (LBIO). I'm not doing anything very aggressive with them, but I like the action in them and am watching for additional entry points. (TherapeuticsMD is part of TheStreet's Stocks Under $10 portfolio.)
The market has some positive action, but not very convincing so far. The longer we hold, the better the potential, but the appetite for chasing is suppressed.
Sept. 21, 2015 | 7:21 AM EDT
The Bears Have the Edge
- · It is more important t now to protect capital than it is to chase returns.
The second mouse gets the cheese. -- Terry Pratchett
With the drama over the Fed rate decision over for now, the big question is whether it will have continued fallout that will keep the pressure on the market this week.
For more than six years the Fed has been a market positive and market players tend to put a favorable spin on whatever it does. But this time the debate has shifted and the issue isn't how much more dovish the Fed will be, but how quickly it will ramp up its hawkishness.
One thing that surprised some market players last week was the negative market reaction to keeping interest rates at current levels. We have celebrated that sort of decision many times, but the reaction last week indicated a shift in thinking. The main issue was that many folks were wondering how the economy could still be incapable of handling a token raise in interest rates after all the years. Is it possible that the Fed's policies have failed?
The market has loved to love the Fed, but this time there was some loud grumbling about how Fed Chief Janet Yellen was not handling things well. In addition there is some outright disgust over the constant chattering by various Fed members that has turned transparency into a confusing mess devoid of clarity.
So where do we go from here?
From a technical standpoint there is nothing in the charts to suggest that a recovery is going to be quick and easy. We tested the upper end of the trading range in front of the Fed and then fell back into the middle of it as a sell-the-news reaction hit. We have some underlying support here, but further slippage would not be a surprise. Overhead resistance at S&P 2000 is the key upside level now. We need to cut through there and hold in order to build a platform for move upside. Right now the path of least resistance is to the downside.
Another problem we have right now is that we are in the middle of the worst seasonality of the year. Seasonality isn't a certainty but it is a tendency and it is aided with a problematic technical pattern like we have now. September is the worst month of the year and this is typically the worst week. Watch for the computer programs to try to exploit those tendencies.
On the bright side, there has been some opportunity for individual stock picking. Small biotechnology names, for example, offered a number of good trades if you stayed selective. There isn't a huge supply of opportunities, but there are some things that are not moving with the overall market trend. Some of the best trades are often things that move counter to the prevailing trend and that is what traders need to focus on.
Overall, the bears have the edge right now. The technical patterns are poor, the news flow is presenting problems, seasonality is an issue and there really is no good upside leadership right now. The bulls are going to argue that the Fed doesn't matter and that we should easily recovery, but the price action suggests that a high level of optimism is more hope than reality.
We have a slightly positive open setting up, but faith in a strength on Monday morning is thin. The important thing is to make sure you are managing positions tightly and playing strong defense. It is far more important right now to protect capital than it is to chase returns.