Indices Look Susceptible to a Pullback, and a Way to Play a Dinged Biopharma

Equities continue to grind their way up despite a litany of worries. The chance of any kind of V-shaped economic recovery are ebbing by the day. The pace of reopening has slowed noticeably and in several cases has reversed course as states struggle with rising Covid-19 confirmed cases. We are nowhere close to reopening the nation's schools even as 99.96% of the individuals who have succumbed to the virus have been adults, with the median age of fatality being 78 years old in this country. This will be an obstacle to any economic restart, not to mention have long-term effects on the nation's youth. Finally, new stimulus efforts and some sort of extension of federal unemployment benefits are plodding forward slowly. One of the huge worries I have for the market, and another reason why I continue to expect a significant pullback in equities after a massive rally since the late March lows, is the lack of breadth in the markets. This is starting to gain attention from other Real Money Pro contributors and other pundits. Recently, the indices, especially the Nasdaq, have been led by a few well-known mega-cap names such as Apple Inc. , which now has an amazing $1.7 trillion market cap. The stock is up more than 30% this year and now goes for more than 30x fiscal 2019's profits despite a still-moribund global economy. Amazon.com Inc. and Microsoft Corp. sport similar market caps. It seems like just yesterday that a trillion-dollar stock market value was a historic achievement. Yet Apple is a value stock compared to the likes of Tesla Inc. , which will eke out a small profit this year yet sports a market cap of $290 billion after its massive run in recent months. As my late father liked to quip, nothing grows to the sky and these names seem way overdue for some sort of significant pause. Given their weightings, any pullback significantly will impact many indices and the market itself. It's just one more reason I largely continue to sit on my hands in this market, content to let my cash position build as my covered call positions incrementally expire in the money come the third Friday of every month. I believe there will be better buying opportunities and lower entry points before year end. I still act on the occasional opportunity on individual stocks via covered calls when warranted. On Tuesday, I made a small move using this strategy in Acadia Pharmaceuticals Inc. . The stock fell 20% in trading Tuesday to the $45 level after its primary compound Nuplazid for the adjunctive treatment of major depressive disorder missed hitting its primary endpoint in a late-stage trial. The study did manage to hit is secondary endpoint. I always viewed approval in this indication as a bit less than a coin flip, so I wasn't surprised by the outcome. Nuplazid sales are growing strongly in its approved indication and the Food and Drug Administration (FDA) just accepted its supplemental marketing application seeking approval of Nuplazid for the treatment of hallucinations and delusions associated with dementia-related psychosis. I think it has a good chance of approval here. I tried to take advantage of this hiccup in the share price. Using the March $45 call strikes, I fashioned some buy-write option plays that were executed at a net debit (stock price minus option premium) of $36 a share. This provides approximately 20% of downside protection and potentially could deliver a 25% return over the next eight months even if the stock does nothing from here. It is another good example of playing small ball in what I consider to be an overvalued market.

Indices Look Susceptible to a Pullback, and a Way to Play a Dinged Biopharma

Various hard-charging mega-cap stocks seem overdue for a significant pause, while a drop in Acadia Pharmaceuticals sets up an options play.

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