After more than six months of an extremely dull market with equities staying within a very narrow trading range, volatility has exploded over the past few weeks.
Stocks rarely moved one percent for the day throughout most of 2015 but lately two or three percent moves in the last hour of trading have not been uncommon.
Although this action is like manna from heaven to quick acting traders, it is very unsettling to the average investor.
[ad#Google Adsense 336×280-IA]We have seen more action in the market in August than the previous seven months of the year combined.
As an example, stocks had a massive reversal last Tuesday; after being up impressively for most of the day, indices reverse suddenly with the Dow Jones Industrial Average plunging some 500 points just in the last hour of trading.
Wednesday then saw the biggest rally percentage wise across the major indices in four years.
Investors are getting whipsawed in this sort of environment especially in the high beta areas of the market such as small cap equities and the biotech sector.
Small caps even after Wednesday’s rally are in official “correction” territory. Before righting the ship on Wednesday, the biotech sector was getting close to a 20% decline which would put it in a bear market.
As one can imagine, my inbox has been overflowing recently by inquiries from subscribers and readers about what to make of both the market in general and the biotech sector in particular.
First of all, I believe it is too early to sound an “all clear” signal despite the massive rally midweek. For that to happen I think we need China equities to stabilize as five percent daily moves there are unsettling to global markets.
I also think the Federal Reserve needs to take its first interest rate hike since 2006 off the table for September and quite possibly for the rest of 2015. The last thing the global economy needs right now is reduced liquidity and a further strengthening of the dollar.
As for the biotech sector specifically, here is what advice and strategy I have been giving in response to questions. I always believe that a well-managed diversified biotech portfolio should be weighted at least 50% and up to 75% to the large cap growth concerns within the sector. The exact percentage depends on the risk profile of the individual investor.
These are companies that are churning out both revenue and earnings growth consistently regardless of the global economy and that are sporting reasonable valuations. These companies have established products, deep pipelines, and strong balance sheets.
If the downturn continues, these stocks will also go down significantly less than their smaller cap brethren. Therefore, I would be allocating most of any “dry powder” to these large cap concerns when the dips in the market come.
Names I would be recommending in this part of the biotech space right now would include Gilead Sciences (NASDAQ: GILD), Amgen (NASDAQ: AMGN), Biogen Idec (NASDAQ: BIIB), AbbVie (NASDAQ: ABBV) and Celgene (NASDAQ: CELG).
A much smaller percentage of available funds should be going into the small cap part of the biotech sector should we get further declines. I would concentrate this new money on promising small cap concerns that have pulled back nicely in this correction but whose future prospects are the same as they were a month ago.
Personally, I am primarily focused on small cap biotech equities with multiple “shots on goals”, collaboration deals in place with bigger players in the industry and that have solid balance sheets and strong analyst support.
Names in this category that have been profiled multiple times on these pages include AVEO Pharmaceuticals (NASDAQ: AVEO). Agenus (NASDAQ: AGEN), Halozyme Therapeutics (NASDAQ: HALO), Synergy Pharmaceuticals (NASDAQ: SGYP), Progenics Pharmaceuticals (NASDAQ: PGNX) and Eagle Pharmaceuticals (NASDAQ: EGRX).
Nimbleness can bring rewards for active investors. By paying attention and taking rapid action during last Monday’s quasi “flash crash” I was able to pick up additional shares of AbbVie for under $60.00 a share and Celgene at the unbelievable price of just $93.00 a share.
For less active investors, it is best to be very incremental in deploying new capital right now due to the extreme volatility of the market and the biotech sector in particular.
If I was thinking of deploying $10,000 into a new position or adding additional shares in a core position within the sector, I would be putting that to work in three or four installments instead of all at once.
I don’t believe the recent volatility of the markets is quite over yet and it is highly likely we get some additional “buy the dip” opportunities so I would not be going whole hog into the market right now especially the high beta biotech space.
Happy Hunting.
— Bret Jensen
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Source: Investors Alley
Positions: Long ABBV, AMGN, AVEO, AGEN, BIIB, CELG, EGRX, GILD, HALO, PGNX, SGYP