Biotech Breaks Out and States Continue to Open

May 13, 2020
BuyLine2

The HCM BuyLine® continues to do its job. We are oversold on a short-term basis, so a pullback is not to be unexpected, but the trend is up. Volatility is starting to subside with news of more and more states opening back up for business. There really is no other course of action than to start opening back up.

Biotech (IBB) just broke out of a five-year period of consolidation, and we consider this a long-term bullish sign. This is positive for the strength of the overall market going forward. This group currently began exhibiting characteristics that were very common to a bullish period just before a major 4-year rally.

Among the similarities to 2012, which was the beginning of that 4-year rally, major pharmaceutical firms have been buying up promising biotechs. The mergers provide big pharma growth by capitalizing research and development that turns into big revenues once treatments are approved, and a vaccine for COVID-19 could be one such drug. 

SPX

An even more striking similarity to that pre-rally period 8 years ago has been the use of technology to help accelerate the path to FDA approval. In 2012, it was high-speed computers that facilitated then-cutting-edge DNA sequencing, which was responsible for many new drug developments. 

IBB Bio Tech

As you can see in the chart above, biotechnology stocks have just broken out of a 5-year base. Historically, the longer a base breakout, the longer the advance out of that base. I have also highlighted the period following a 7-year base breakout for this group that occurred in early 2012.

COVID-19 Update

 There appears to be a multi-state, simultaneous reduction in COVID-19 reported cases, particularly in all the Northeast states (NY, NJ, CT, MA, PA), and this had led to total reported cases crashing below 20,000 for the first time in almost eight weeks. Because no states instituted stricter measures in the past 14 days, the spontaneous drop in cases across the U.S. does seem to suggest COVID-19 could be "burning out" to an extent. In fact, this drop in cases is occurring at a time when residents across the U.S. are less "compliant" with mitigation measures. COVID-19 tests surged above 400,000 yesterday versus 300,000 in the past few days, so it is not due to a drop in tests.

But, as states ease and residents venture out, many will worry about a second wave. Scott Gottlieb, the former FDA commissioner, flagged a study by U.K. researchers, and the conclusion was that COVID-19 required "herd immunity" may be much lower at 10% (versus 60%-70% conventional thinking) as susceptible cohorts are already exposed. If this is true, this reduces the risk of a second wave and could support the "optimistic" case for economic outcomes.

Time will tell.

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