Submitted by Eric Bush via Gavekal Capital blog [3],
Biogen’s $85 (or 22%) drop on Friday has put a spotlight on the biotechnology sub-industry as a whole. And rightfully so, as biotech has been the best performing sub-industry in the United States over the past four years (as always, this data is on an equal-weighted basis). Biogen, which was the third largest biotech stock by market cap before the drop and is now the fifth largest, has generally been a stock market leader. Whenever leadership begins to turnover that is usually an important signal for the market. So has biotech run its course?
Top 5 Sub-Industries Over The Past Four Years
Let’s take a look at the other five largest biotech stocks (there are 17 total biotech stocks in the GKCI US Biotech Sub-Industry), to see how any market cap weighted biotech index may perform in the near future.
The two largest biotech stocks by market cap are Gilead Sciences and Amgen. Gilead just poked out to new highs after trading in a tight trading range for most of the past year. While it is always positive for a stock to be making new highs, given the extended run that Gilead has been on its a bit concerning to see the stock not exploding higher to new highs. The longer the run for a stock the more momentum it needs to continue to keep powering ahead.
Amgen’s chart looks a lot like Gilead’s except that its been a slightly less volatile stock and hasn’t had quite as strong of a bull move. Amgen has been stuck in a sideways pattern for about a year as well and has yet to move to new highs as Gilead recently did.
Celgene continues to show strong momentum. It has clearly broken out to new highs while remaining on its “high performance” trend line. Of the 6 largest biotech stocks, Celgene seems to have the most moementum behind it.
Regeneron Pharmaceutical has been on a steady upward trend for the past four years. It hasn’t retested its support line for about year and currently is pretty extended. However, it is interesting to note that while Gilead, Amgen, and Celgen experienced a loss of momentum in 2014 (by either moving sideways or going down in Celgene’s case), Regeneron continued on a solid upward trend.
Here is Biogen’s chart after falling into a bear market in one day. It has fallen back almost exactly to a former resistance level, which is now support, for the stock. However, it seems that Biogen is in the process of forming a top, a formation it has been working on since the end of 2013, and whenever it breaks below support it will be a long drop from there. While there may be a short-term bounce given the dramatic single day decline, the longer term outlook is poor and Biogen will most likely market perform for the foreseeable future with considerable underperformance risks outweighing any postive attributes for the stock.
Finally, let’s look at the 6th largest biotech stock, Alexion. Alexion looks a lot Gilead. While it has recently made new highs after trading in a sideways range for over a year, it doesn’t look like it has the strong momentum behind it like Celgene has. It also has failed to keep on the right side of its bullish trend line that has been in a place for the past four years. That is a negative sign.
Overall, the bull market in biotech stocks doesn’t look like it will end in a fury today or tomorrow. However, as Biogen has shown, a high flying group of stocks like this can blow up performance at any moment. The trend in these stocks is still mostly positive, however, momentum seems to be changing for the worse on the margin. As a stock market leading group for most of this bull market, it will be worth investors’ time and effort to keep a close eye on biotech’s performance.
