I'm Eyeing These 7 Biotech Stocks as Rate Cuts Expected
Let's dig into the soft CPI and see why rotation hopes could roll over again.
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A softer-than-expected consumer price index report on Thursday morning was not a huge surprise. The market has been running straight up into the news, and now strong rotational action is occurring as Treasury yields fall and the odds of a September rate cut shoot up to over 80%.
The most notable action on Thursday morning is a very strong rotation into small-cap stock. The Russell 2000 IWM is trading over 2.8%, while the S&P 500 is down 0.2% and the Nasdaq 100 QQQ is down almost 1%
Small caps are the favored sector when interest rates are lower, because most small companies are more dependent on debt. The mega-cap technology names have no debt and plenty of cash, so lower rates are actually a slight negative for them.
There is a big macro move taking place right now out of big-caps and technology and into small-caps. It is index-driven, which is why breadth is so strong, with around 7,300 gainers and just 1,500 losers. There are over 900 new 12-month highs.
I’m hoping that this is the start of a major shift in the market action, but the last few times we saw this sort of action, it fizzled out. The difference this time is that the odds of a September rate cut are much higher.
I’m looking to put more cash to work but staying selective. One of my favorite small-cap groups is biotechnology. There are a number of themes with upcoming catalysts, but the timing is tricky. Biotechnology has been a terrible sector for a very long time, but it has the potential for big moves when the right news hits. It can require great patience and be very frustrating, but if you get the timing right when the stocks are finally discovered, they will outperform everything else.
A few names that I’m watching very closely right now are Xeris XERS, Fulcrum Therapeutics FULC, Humacyte HUMA (which I recently highlighted as a favorite), Solid Biosciences SLDB, BridgeBio BBIO, Lantheus LNTH, and TG Therapeutics TGTX.
The rotational action is picking up steam as I write and the QQQ is sinking fast. The big risk is that it will reverse again, but with rate cuts becoming much more certain, it is likely that small caps and biotechnology may hold up this time.
At the time of publication, DePorre was long XERS, FULC, HUMA, SLDB, BBIO. LNTH, TGTX.
