First, in last week's game plan I said Eli Lilly would be making a presentation about the results of a key diabetes drug and how it interacts with the heart. Lilly is locked in a war with Novo Nordisk (NVO) , a huge competitor for this market, and, at first, the data looked good.
But then when they parsed the results they were regarded as inferior to Novo's by many different critics. A quick example comes from Credit Suisse: "Based on what we have seen so far, we believe Novo's data are in line with expectations while Lilly's data has been in line to disappointing leading us to expect Novo's shares to rise and Lilly's shares to see some weakness."
That's exactly what happened. Lilly's shares went from $118 to $112 in a two-day pummeling because the drug is so important to Lilly's numbers.
But then we get some softer macro numbers, numbers that show tame inflation, numbers that hint we could be about to have another leg down in the economy. You overlay that with a steep drop in oil of almost two dollars and the next thing you know you have an incredible rotation into none other than the drug stocks, and instead of selling Lilly because of its competition with Novo, people are buying Lilly because it is what you buy when oil is down and the economy is slowing.
The rotation is sending Lilly's stock roaring up $2.80. It has made up a huge amount of the decline on no news whatsoever.
Okay, maybe you think that's one off? Let's consider the case of Johnson & Johnson. Do you know just a few weeks ago the stock of JNJ fell from $139 to $131 because of concerns that link it to reckless selling of opioids?
How about this week? Today a star witness in an opioid case said that JNJ did, and I quote, "everything it possibly could to get doctors to prescribe more and more opioids". The testimony seemed pretty devastating. Now only that, the company today lost a big talc-cancer case against it and Colgate (CL) . The companies, in a jury trial, were found to owe $12 million to a dying California woman after it found that the companies caused her mesothelioma.
As bad as the newsflow was a few weeks ago about opioids, this was a double negative, just a nightmare. If you had the talc case alone you could expect JNJ's stock to drop at least five points.
So what's the stock doing? It is having one of the biggest days it has had in ages. Not only that, it is now set up to challenge the old high that it had reached before the Reuters and New York Times' assaults on the company's character because of the wave of talc cases sweeping the country.
I want you to remember both these stocks next time you are about to dump a stock because of some bits of bad news. These high quality companies are the types that always lead rotations when traders think that the economies of the globe are slowing. The rotation always trumps the newsflow. And instead of selling JNJ and LLY on negative news you had to buy them because the economy - the macro - these days is always more important than how a company's really doing and what its prospects might be.