A Remedy for Corona Virus? Biotech Stocks in Breakout Mode

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Biotech stocks have been the poster child of relative strength in recent weeks. Relative strength (not to be confused with the Relative Strength Index) measures the performance of a stock or index against a broader benchmark like the S&P 500 index ($SPX.X). Though the indicator is uncomplicated, traders find it useful for separating the market leaders from the laggards. Relative strength becomes more clear cut when the market sells off like it recently did due to the Corona Virus outbreak. Since three in four stocks typically follow the market direction, the stocks that resist the correction are easy to find.

Two popular instruments that track biotech stocks are the SPDR S&P Biotech ETF (XBI) and the Ishares Nasdaq Biotech ETF (IBB). Last week XBI rose 9.73 percent versus 3.04 percent for the $SPX.X, drastically outperforming. IBB also outperformed its benchmark, registering gains of 9.6 percent versus gains of 6.09 percent in the Nasdaq (@NQ).

Gilead Drug Sparks Hope

Money has poured into the biotech sector as the Corona Virus pandemic has spread. COVID-19 has been devastating in two ways: the effect on health in certain “hot spots” throughout the country as well as the devastating blow to the global economy. Health officials are racing to get a proven and effective treatment into circulation while investors hang on waiting for any sign the economy may be ready to open.

Last week markets and biotech stocks got a spark from a familiar name, Gilead (GILD). Gilead Sciences is a well-known mega-cap biotech stock, brought into the mainstream by the successful use of antiviral drugs for the treatment of HIV, influenza, hepatitis, and other diseases. Last Thursday, researchers from the University of Chicago shared some encouraging news. Remdesivir, one of the first drugs which showed the potential to treat the SARS epidemic is showing positive signs for COVID-19 as well. Out of the 125 patients in severe condition who were part of the study, only two passed away. Most of the patients showed rapid improvements in both fever and respiratory symptoms, the two most common Corona Virus symptoms.

Hurdles Remain

Investors cheered the Gilead news sending the Nasdaq higher by almost 4 percent, while GILD shares rocketed nearly 10 percent. Though the data was encouraging, GILD is still waiting to get through regulation hurdles. 125 patients are not enough to be statistically significant however the Food and Drug Administration (FDA) is now fast-tracking clinical trials. GILD must not only prove that the drug is effective but also safe. The outcome will not only impact GILD, but it will also affect global markets.

Small vaccine companies such as Inovio Pharmaceuticals (INO), Moderna (MRNA), and Novavax (NVAX) have seen shares rise as they race to get vaccines tested.

The Bigger the Better

Many large-cap biotech stocks have been showing strength. Regeneron Pharmaceuticals (REGN) is a large-cap biotech name that also has seen strong price gains. REGN was not in the first group of names to announce potential treatments for COVID-19, but that changed when the company announced that its rheumatoid arthritis drug could potentially help treat patients.

Companies with potential treatments and vaccines for the virus are not the only firms garnering attention. Access to corona testing has also been a big issue, illustrated by the fact that politicians on both sides of the aisle have voiced concerns that there is not fast and efficient testing available. Abbott Laboratories (ABT) seems to have a potential solution to the problem. The medical-diversified behemoth has brought a COVID-19 test to the market with the ability to give a patient test results within five minutes. Before the ABT test was available, tests took anywhere from a few hours to a few days to get back. Shares have hit new 52-week highs as a result.

Biotech Breakout Coming?

IBB, the Nasdaq Biotech ETF, is now trading at levels not seen since August of 2015. Then, the ETF was starting a price digestion after seeing six-fold gains over a five-year period. The question on investors’ minds is can the index break out again? For now, IBB is at resistance, however, if it can clear $133.60 there is no price resistance. One positive bulls can point to is that the IBB has held the 50-month Simple Moving Average (SMA) since it started consolidating.

Like always, traders must be open-minded to the fact that like any potential breakout, this one can fail. One thing to keep in mind is the length of the base. As market technicians like to say, “The bigger the base, the higher out in space.”

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