This Is a Good Time to Make a Stock-Picking List
As biotech is getting hit and we’re seeing ETF-driven selling, I smell opportunity for sharp traders.
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The market is still dealing with inflation, oil, interest rates, Iran and the Fed, but those issues are about to get some competition. Third-quarter earnings season starts in about a week, when JPMorgan Chase (JPM) and the other big banks report, and the focus will start to shift to individual stocks.
We have more rotational action today. The SPDR S&P 500 ETF Trust (SPY), the Roundhill Magnificent Seven ETF (MAGS) and the Invesco QQQ Trust (QQQ) are trending higher, while the iShares Russell 2000 ETF (IWM) is down 0.5% and the iShares Biotechnology ETF (IBB) has reversed sharply lower, down about 2.7%.
The Negative Tier Is Shrinking
Breadth is around 53% positive, down from 61% early, but at this time yesterday it was only about 37%. More stocks outside the mega caps are participating, and the bottom tier of this two-tiered market is getting smaller.
This morning I wrote that the poor breadth makes a positive fourth-quarter outcome more likely, because so many stocks have room to catch up. Today is a small step in that direction. My focus now is to find the stocks that are adding to the better breadth. When a handful of mega caps and the macroeconomic headlines drive the market, there isn’t much to do except manage risk. When more stocks start to act well and earnings reports provide catalysts, the opportunity moves to individual names.
Innocent Victims in Biotech
There is a big reversal in biotechnology today as recent leaders Moderna (MRNA) and Twist Bioscience (TWST) drop sharply from their highs. I suspect that is triggering selling in the biotech ETFs, the SPDR S&P Biotech ETF (XBI) and IBB. When an ETF is sold, all of its components are sold with it, and I’m seeing drops across the board.
The effect is biggest in XBI, because it holds its stocks in roughly equal amounts, so a small, thinly traded biotech gets as much selling as a large one. The stock doesn’t have to have any news. It just has to be in the fund.
This is technical selling, and it is the sort of action that creates innocent victims, stocks that are dumped without fundamental cause. That provides some opportunities in biotech and medtech names I favor:
- Precigen (PGEN) is a long-time favorite. Its gene therapy Papzimeos is approved for recurrent respiratory papillomatosis, a rare disease that causes growths in the airway, and the launch has run well ahead of expectations.
- BridgeBio Pharma (BBIO) sells Attruby for a form of heart failure caused by misfolded proteins. An FDA decision on its muscular dystrophy drug is due Nov. 27, with two more decisions expected next year.
- Absci (ABSI), which I bought yesterday, has the first human data for its hair-loss drug due this quarter.
- Butterfly Network (BFLY) makes handheld ultrasound devices.
- Revolution Medicines (RVMD) won approval in August for daraxonrasib in pancreatic cancer patients who have already been treated, and it is now testing the drug as a first treatment.
Game Plan
I’m not in a rush. ETF-driven selling can last longer than it should, and I’d like to see these stocks stabilize before I add to them. When the selling dries up and they start to hold, the innocent victims tend to bounce back quickly, because there was never a reason for them to fall in the first place. Better late than early.
If you are so inclined, this is a good time to build a list of stocks with good charts and catalysts ahead that are being sold with the group rather than on their own news.
At the time of publication, DePorre was long PGEN, BBIO, ABSI, BFLY, RVMD
