Coronavirus speculators have been scooping up shares of small-cap and thinly traded biotechnology companies at a furious pace, lifting these undercapitalized issues into vertical uptrends. Many of these stocks have jumped more than 40% in the past few weeks, while a select few have doubled or tripled in price. While most or all will fail in their efforts, price gains may continue into the second quarter, offering high-reward and high-risk trading opportunities.

But let's be clear – the current winner's list is filled with a plethora of market laggards that jump every time there's a biological crisis like Ebola, SARS, or Zika. Long-time market players are fully aware of these trading dogs, ready to pounce on them as soon as scary headlines get the public's attention. They're also ready to sell these stocks aggressively when buying interest wanes, leaving less-informed individuals holding the bag.

Three distinct groups with different ambitions tend to take ownership of these volatile issues. First are skilled momentum players, buying low in order to sell higher. Second, small retail traders jump on board because they read the news, see rising prices, and try to catch the wave. Third, and at most risk, true believers load up, hoping that their horse will win the race and become the next pharmaceutical powerhouse.

It's already late in the game for these strategies, so most folks should avoid exposure, instead seeking profits in blue chips that have the firepower to withstand the current correction. However, if you insist on owning this speculative sector, choose the most liquid plays to avoid wide bid/ask spreads and wait for deep pullbacks, which are inevitable because predatory algorithms are lying in wait, looking for the perfect opportunity to shake out poorly informed shareholders.

Chart showing the share price performance of Co-Diagnostics, Inc. (CODX)
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Co-Diagnostics, Inc. (CODX) manufactures and markets molecular-level reagents used for diagnostic testing. It entered the public markets at $6.00 in July 2017, topping out at that level and entering a downtrend that posted an all-time low at $0.69 in June 2019. A secondary downdraft tested that level successfully in December, while the subsequent recovery wave went vertical in two rally waves after the virus outbreak hit the headlines.

The stock broke out above 2017 resistance at $6.84 on Wednesday and traded as high as $21.75 on Friday morning before ending the week at $13.23. Its bid is around $18.50 in Monday's pre-market, bouncing back after biotech giant Gilead Sciences, Inc. (GILD) announced the acquisition of a sector rival. Co-Diagnostics is an extremely risky play but is one of the few in the group to post an all-time high during the six-week rally wave. As a result, buying the first pullback into the single digits could offer opportune profits as long as tight stops are utilized.

Chart showing the share price performance of Vir Biotechnology, Inc. (VIR)
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Vir Biotechnology, Inc. (VIR) develops and markets therapeutics for the treatment and prevention of infectious diseases. It came public at $16.15 in October 2019 and settled into a trading range between that level and support near $13.50. It broke down in November, entering a downtrend that hit an all-time low at $11.65 a few weeks later. The stock tested that level into January and turned higher, breaking out above the 2019 high before stalling in the upper $20s.  

An orderly pullback found support on top of the breakout level last week, giving way to a momentum-fueled advance that more than tripled the stock price in just four sessions. It sold off nearly 14 points on Friday and could enter a deeper slide in coming sessions, eventually reaching strong support in the $20s. Proceed at your own caution between now and then because massive intraday trading ranges are a recipe for disaster.

Chart showing the share price performance of Trillium Therapeutics, Inc. (TRIL)
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Canada's Trillium Therapeutics, Inc. (TRIL) engages in stem cell research for the treatment of cancer and other diseases. The stock came public on the U.S. exchanges at $7.80 in December 2014, entering an immediate uptrend that attracted broad-based momentum buying interest. The rally posted an all-time high at $29.92 in April 2015 and reversed, entering a shallow decline that picked up steam in the fourth quarter of 2018.

The downtrend hit an all-time low at $0.24 in August 2019, while an October retest held that support level. The stock turned sharply higher in December, reaching $3.90 at the time of the virus outbreak. The news failed to move this issue until last week, when it jumped nearly 70% in a single session, closing near January resistance. Trillium stock is trading at an all-time high above $7.00 in Monday's pre-market, while the long-term chart shows plenty of wiggle room into the mid-teens.

The Bottom Line

A basket of 15 to 20 small-cap biotech stocks turned sharply higher after the coronavirus outbreak, entering momentum-fueled uptrends that are now crowded with weak-handed market players. While most folks should avoid these issues like the plague due to excessive risk, those seeking exposure should use shakeouts and downdrafts to get on board rather than chasing the upside.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.