The biotech-fueled rally could soon run out of gas (BBH, AMGN, GILD, BIIB, ACOR, VPHM, CYTK, LIFE, REGN)

July 28, 2009 · Filed Under General 

 Biotechnology stocks that have  fueled the rally in U.S. stocks since March are showing several warning signs that the rally could tucker out soon.

In the past 90 days, the roughly 120 small and mid-cap biotech stocks that we track at BioHealthInvestor.com have risen 46.7 percent in aggregate, vs. 19.4 percent for about 2,600 similarly-sized U.S. stocks. With the exception of auto component stocks that have rallied more than 50 percent, no other group has seen larger share gains than the small-and-mid-cap biotechs.

Could the rally be coming to an end? There’s reason to believe that could happen, judging partly by the BBH. The most closely watched biotech trading instrument is the Biotech HOldrs (NYSE: BBH). Major components are Amgen Inc. (Nasdaq: AMGN), Gilead Sciences Inc. (Nasdaq: GILD) and Biogen Idec Inc. (Nasdaq: BIIB).

THE BBH has rallied in 10 of the past 12 sessions, and now is approaching resistance near last year’s index price high near 107; the index is now above 103.

An index approaching a minor resistance level is usually not a big deal. But there also is resistance just above the 110 level, dating to the 2005 high. The two resistance levels together are fairly close to a double-top — a formation that marks major resistance, and one that few indices are able to break through on their first try.

Major resistance is indeed surmountable in cases when a stock index has plenty of juice — namely catalysts like earnings, improving stock volumes, and oscillators that are not overheated.

None of that is true for the BBH. The major earnings reports are at least half-way done. Trading volumes for the BBH have been declining in recent weeks as it continues to rally. And the oscillators are very overheated, judging from both the relative strength index (RSI) and stochastics.

The market itself appears due for a breather. The S&P has not declined more than a whole point in a single trading session since July 7 — effectively marking a 15-day rally. And the McClellan Oscillator is at 220, when a reading of 150 or more is generally a sign of overheated conditions.

Institutional shareholders have purposely gravitated toward some of the riskiest stock assets over the past three months, as seen by our past analysis of balance sheet quality of the S&P 500. The worse the Z-score, or balance sheet quality, the more a stock has rallied ever since March. And with many small-cap biotechs being kept alive by milestone payments.

See related story.

 

If the market becomes more risk-averse soon, it’s the smaller biotechs that may pay the heaviest price, simply because they benefited most from the risk-taking in the rally off the March lows.

Following are particular smaller and mid-size biotech stocks with very bullish analyst sentiment that are showing some potentially bearish signs:

Acorda Therapeutics Inc. (Nasdaq: ACOR) still has a bullish chart, but it is approaching resistance near $28, and may not have much gas left, based on a very high slow stochastic reading.

ViroPharma Inc. (Nasdaq: VPHM), has big resistance near $7.25, and is now seeing RSI and stochastics oscillators turn lower at extremes.

Cytokinetics Inc. (Nasdaq: CYTK) has marked long-wicked candles in several recent sessions. The oscillators are yet not at extremes. MACD has turned positive, which is one potentially bullish sign. But it has not broken out to new closing highs above $3.10, and it needs to do so soon, given that the sector and market rallies both are getting long in the tooth.

Life Technologies Corp. (Nasdaq: LIFE) shares are still in a strong uptrend since late 2008, and have doubled over that timeframe. But there is major resistance at last summer’s highs near $45 that looks to be all the more important amid falling stock volume and MACD.

Regeneron Pharmaceuticals Inc. (Nasdaq: REGN) is a hard stock to bet against, given the volumes that have come into the name over the past four trading sessions. Yet oscillators are at extremes, and the stock appears likely to pull back as it reaches resistance in the $23 to $25 area. — Mike Tarsala

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