After a stunning 96% rally from the April 2014 low to the July 2015 highs, the Biotech sector is now in a bear market with a 22% decline from the highs.
The Ishares Nasdaq Biotechnology ETF (IBB) has 144 stocks. More than 72% are already in a bear market with declines of 20% or more and 96% are in a correction with declines of 10% or more. The Nasdaq was very dependent on the biotech sector for much of its recent gains and now its losses.
The Biotechnology Index is dramatically influenced by the larger stocks and until recently, they have held their gains. On a technical basis, the sector could see additional declines since we have barely scratched the surface on cashing out the gains made over the last year.
With capital gains season just ahead and the market showing the potential for further declines, we could see fund managers begin to take profits in the stocks they have held long term. Taking profits in the biotech stocks could cushion losses they have taken in other areas such as energy and commodities.
While I would like to buy the dip in the sector, I think it would be prudent to wait for a bottom to form. Portfolio managers typically use the early October period to restructure their portfolio and position themselves for a yearend rally. Be prepared for the biotechs to take the brunt of the selling.
The chip sector is also undergoing some distribution. With the outlook for PC sales declining on a monthly basis the outlook for chip stocks is fading. While tablets are taking the place of the PC the number of chips in a tablet is significantly less than those in a PC and associated hardware including video cards, memory and hard drives.
The Semiconductor Index ($SOX) retested the October 2014 lows at 545 during the August flash crash. Like the rest of the indexes, the rebound is fading and in the case of slowing demand, any retest of the low may fail.
With oil prices holding at $44 and diesel prices averaging $2.50 nationwide you would expect the Dow Transports to be in a positive trend. However, the slowing global economy is weighing on the shippers. FedEx just posted disappointing earnings and warned about the current quarter. The railroads are struggling over a decrease in the amount of coal being shipped and a drop in frac sand and well pipe being delivered. The slowdown in the energy sector has taken tens of thousands of railcars of sand out of the picture. Oil well pipe usage has declined by more than 60%.
Airlines are the only segment doing well but they cannot hold up the transportation sector on their own. The Dow Transports are down -16% from their highs and I would expect them to make new lows in the weeks ahead.
The S&P remains well over its long-term 200-week average at 1,722 but remains in correction territory. Many analysts believe the S&P could retest the 1,820 low from last October. The uptrend has been broken and the August low was not to a major support point.
Last week somebody bought 50,000 June $186 SPY puts for $11 each. That is roughly $55 million in a bearish position. This could be a hedge on a portfolio of up to $1 billion. It could also be a speculative bet that the global economy is going to continue to collapse and the August lows were just a preview of coming attractions. Lastly, it could be speculation by someone that knows of an impending global event, possibly a terrorist attack, that will knock our markets down as we saw after 9/11. You would have to be pretty confident to speculate that strongly on market direction regardless of the reason. Personally, I think it is probably portfolio insurance. With the long June strike, the premiums will bleed slowly and the owner can exit at the end of October if the historical end of year rally appears.
The SPY $186 strike equates to 1,860 on the S&P-500 and we closed at 1,931 on Friday. The $182 level on the SPY equates to 1,820 on the S&P and the target being discussed by many market technicians.
The NYSE Composite ($NYA) has collapsed farther than the big cap averages. The composite index is all the stocks on the NYSE and contains everything from the smallest capitalization biotech stock to the largest energy stock like Exxon.
The NYA declined to its 200-week average during the flash crash and did not rebound significantly. This index is broken and suggests we are going to see lower lows. If the 9,725 level breaks again I would expect to see a decline to 9,000.
The Russell 3000 has held up better than the NYSE Composite. This is the 3,000 largest stocks in the market and combines the Russell 1000 and the Russell 2000. The R3K is still about 80 points above the October 2014 low at 1,079 and that would be the target if further weakness appears over the next ten trading days.
On a purely technical basis, the various indexes appear to be predicting further weakness in the days ahead. The biotechs could drag the Nasdaq lower as fund managers take profits to offset losses in other areas.
I would continue to recommend creating a shopping list of stocks to buy on any decline that looks like a capitulation event. Typically, when these corrections appear they end with a capitulation event where everyone becomes frustrated and flushes their holdings. That is typically the bottom.
Enter passively and exit aggressively!
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