Biotech research proves the need for stop losses.
President Clinton presented the biotech sector with a huge going away present today. He announced today that he and British Prime Minister Blair were going to suggest that biotech companies should make public data on discoveries related to the human genome. While just a suggestion and a well meaning initiative, investors in the biotech sector, which is counting on huge windfall profits from gene research, ran for the exits. At least that is the way it appeared. The many biotech stocks that had been on a record run for several weeks immediately went into a power dive. Many were down $30, $40, $50 even $60+ dollars per share at one point. It should be noted that the volume was light and all retail in small lots but there was a real panic. The AMEX biotech index went into free fall and closed down -32% from its recent high.
The markets opened up strong even in the face of a stronger than expected Retail sales report. Sales in Feb were up +1.1% with Jan revised +.4% upward. This showed the consumer is alive and well, spending their children's inheritance and having fun doing it. The joys of sales were short lived however and the biotech slide crippled the Nasdaq and one by one all the leaders from the past two weeks fell victim to profit taking. I had nine open positions from yesterday and I had all nine charts running on Qcharts as I watched the day progress. It was as if someone was looking over my shoulder as the day progressed. First ARBA, up over $15 at the open and then the obligatory sell off to a reasonable level. Things were moving fine with a nice slow uptrend when suddenly a gap down at 11:30. Bang, I pull the trigger and out. 20 min later another, gap down almost instantly. Out, then another and another. All day several of the traders in the office were sending instant messages. ALLR died! NTAP died! EMLX died! YHOO died! Unlike the biotechs that had been moving down from the open these stocks were doing fine and even posting gains and then suddenly double digit drops. It was as if the day traders of the world were looking for the only stocks holding their ground and shot them down one by one. With leaders dropping like dead soldiers left and right the markets never had a chance.
Actually, in retrospect, I am glad to see the extreme drops. We were due for that painful exercise called a Nasdaq correction. No long drawn out slow leak like the Dow. -423 points, three days. Nothing tame about the Nasdaq. I said I was glad and it is because it is that time of the month. You know. The week that is littered with economic reports and followed by a Fed meeting and rate hike. We needed the correction to be sharp and swift with capitulation events for all stocks. Boy did we get it! When we get past these next five days, and it may be a struggle, we should be ready to run into April earnings. No PPI/CPI/FED and the correction should be over. What more could you ask for?
If you are going to hold a correction this is the way to run it. Record setting, attention getting and NOBODY is going to miss it. If you are sitting around next week wondering when we are going to get a good entry point then give your money to your kids now. You can't be trusted with it. Today was the second biggest point loss in Nasdaq history and followed the fourth biggest loss yesterday. Today was also the largest trading range in Nasdaq history. Over 300 intraday points! This was also the first time in history that the Nasdaq has posted back to back days over -100 points down. The Nasdaq is now down -8.5% from the intraday high last Friday. Only -90 points to go for a technical -10% correction.
There were some positive events after the close today that would have moved the market under normal circumstances.
Oracle announced earnings after the close of $.17 that beat the streets estimates of $.13 very easily. Profits were up +80% and the stock was up $6.00 after hours. Good profits and a good outlook never hurts the street. VRTY also announced profits of $.34 beating estimates of $.12 and was up almost +$10.00 in after hours.
In case the earnings news was not enough the blockbuster of the day was the announcement on CNBC that YHOO and EBAY were in talks to merge. Incredible, YHOO, EBAY and AOL all in the same fold. Although AOL is merging with Time Warner there are strong ties to YHOO and EBAY separately and together they will dominate the Internet sector in terms of eyeballs and profitability. EBAY soared +$23 on the news and the Nasdaq futures headed north to the tune of +25 points. The futures gain was short lived.
With the Dow and Nasdaq both heading in the same direction for a change there was money flowing back into bonds as investors had enough of the good market, bad market switcheroo and just wanted someplace to park the money until the smoke clears. The bond market was already volatile after the government announced they were going to buy back another $1 billion in 30 yr bonds, only the second buyback since 1930.
The S&P-500, not wanting to be left out of the news today, managed a seldom seen total of new highs. You guessed it, zero. Of the 500 stocks not one managed a new high today.
For tomorrow the biohazard scare should be over. There was another press release to correct the damage of the first. The initiative is not supposed to cover intellectual property or patent capable secrets. The initiative is to broadcast the raw data to allow other companies to do research as well. Most analysts think the sell off today was very over done and the stocks represent a real bargain compared to their previous highs. Analysts say just making the raw data available will have no impact on any biotech firm. Just having access to the billions of words of data will not help you unless you know where to look and what you are looking for. Then you need some method to use the data to create a new medical process. The sell off was the equivalent of saying CNBC has no value because all the market news is readily available everywhere. I would like to think of it like OIN. Everyone has access to more stock, options symbols, charts, news and price data every day than you could use in a lifetime but it is useless unless you know what to do with it and when. At OIN we mine this data every day so that our readers will have a head start. The biotech companies could make all the raw data available they want but the key is of course how to put the data to use in a real medical procedure. That intellectual property will never go away. The second press release qualified that patented processes were not at risk. Look for prices to continue back up tomorrow unless another interpretation surfaces. In reality the human genome project is being funded in part by the government and it has always been understood that the results would be combined with all other results into a public database. Much ado about nothing!
Just when you would think that the continued market drop is bound to stop any day, even in the face of the PPI/CPI, there is another hurdle we have to cross. The Nasdaq-100 and the S&P-500 will be reweighted this Friday. Since these indexes are weighted by market cap (number of shares outstanding x share price) any stock buybacks by companies in the index impacts the weighting. With the broader markets down so far recently many companies have been aggressively buying back stock at the cheaper prices. If a companies weighting is impacted by buybacks then the index funds that try to mimic the S&P and Nasdaq must sell stock to rebalance their portfolios. Some companies have been buying back stock so aggressively that as much as 10% of their float may be at risk. Not all companies will have stock sold. CSCO for instance has more outstanding than in the past and funds could be forced to buy CSCO stock. The majority of transactions this Friday will be sales. The new weighting will be made known Wednesday night and fund managers will know what they need to do by Thursday morning. The PPI/CPI may not be the biggest problem we face this week. Did I mention that this is a triple witch options expiration week as well? Triple witch weeks are normally volatile in the beginning and then move to a bullish bias by Thursday. We have certainly had the volatility lets hope we get the bullish bias as well.
S&P futures are down -5.00 and Nasdaq futures are back to zero at 8:25ET. Fasten your seatbelts!
Trade smart and sell too soon.
Current long positions include:
IDPH, AFFX, HGSI, CRA, KSU