Biotech stocks struggled through most of 2019 but have now awoken from their long slumber and joined broad benchmarks in the fourth quarter rally. Big-cap components have posted the strongest gains since the uptick started in October, highlighting their membership in index funds that are now hitting all-time highs. Even so, more speculative mid and small caps have also gained ground, underpinned by the recent resurgence in the Russell 2000 small-cap index.
The biotech tape is reacting to the classic tendency for a "rising market to float all boats" while climbing a wall of worry ahead of a 2020 presidential election that will highlight radical solutions to reduce health care costs and drug prices. It appears that the market is now placing a bet that "Medicare-for-All" and other disruptive initiatives have little or no chance of passage, regardless of who wins the election.
iShares Nasdaq Biotechnology Index Fund (IBB) broke out to a new high in 2012 and entered a powerful trend advance that topped out in the mid-$130s in 2015 when scandals involving Valeant Pharmaceuticals, now Bausch Health Companies Inc. (BHC), and Martin Shkreli’s Turing Pharmaceuticals hit the headlines. The decline ended seven months later after a 40% slide, generating three tests of support into December 2018.
Price action reached the .786 Fibonacci sell-off retracement level in March 2019, pulled back into October, and is now testing the first quarter high. The straight up tape in the past seven weeks isn't favorable for a stable breakout, suggesting a downturn that is likely to find support at or above the narrowly aligned 50- and 200-day exponential moving averages (EMAs) near $106. That pullback could offer a low-risk buying opportunity ahead of a test at the 2018 high above $120.
Amgen Inc. (AMGN) has lifted into the ninth slot in Nasdaq 100 component relative strength in November, highlighting the strong bid in blue-chip biotech stocks. It broke out above 12-year resistance in the mid-$80s in 2012 and entered a strong uptrend that topped out at $182 in August 2015. A September 2017 breakout eased into a shallow rising channel, but buying pressure is now accelerating, predicting considerable upside in the next 12 to 18 months.
The stock broke out above five-year channel resistance at $222 last week and added about 10 points into Friday's closing bell. Accumulation indicators hit new highs as well, raising the odds for a sustained uptick toward $250. However, an intermediate reversal is likely in coming sessions, with a pullback into new support offering a low-risk buying opportunity. Keep stops tighter than usual during that test because a failure from a channel breakout can end long-term uptrends.
Vertex Pharmaceuticals Incorporated (VRTX) sits just below Amgen on the Nasdaq 100 leader board after breaking out to an all-time high in October. It completed a round trip into the 2000 high near $100 in 2014 and broke out, but the uptick failed in 2016, imitating a year of underperformance. The stock finally bottomed out in January 2017 and turned sharply higher, breaking out to a new high in July of that year.
Price action then eased into a rising channel, ahead of a November 2019 breakout that reached an all-time high at $218.60 on Friday. Even so, the uptick has now hit a second line of resistance, raising the odds for an intermediate reversal that tests new channel support between $200 and $205. As a result, it isn't wise to chase the upside right here, especially after an unrelenting seven-week 32% rally. Instead, wait for the pullback and get on board at a more advantageous price.
The Bottom Line
Biotech stocks are attracting healthy fourth quarter buying interest after a long period of apathetic price action.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.