Monday, June 23, 2014

Drug stocks in the balance

On Monday (Jun. 16) we also looked at the short-term directional indicator for the biotech/pharmaceutical stock group.  We saw that this important leading indicator was signaling an upside breakout for the NYSE Pharmaceutical Index (DRG).  After a spate of mergers and takeover bids earlier this year, the drugs/biotechs spent the last several weeks cooling off with biotechs suffering the bigger correction. 

Until recently, weak internal momentum prevented the drug stocks from participating in the latest broad market rally.  As the short-term directional indicator correctly predicted, however, drug and biotech stocks broke out to higher levels this week.  Below you can see the move to new yearly highs in the DRG. 

The iShares NASDAQ Biotech ETF (IBB) meanwhile was up some 2% on Friday and is now challenging the March highs.  This has great psychological important since the financial press has focused heavily on IBB in the past several weeks, using it as an example of Wall Street’s bearishness on the industry.  The renewed upward trend in DRG and IBB shows just how much that psychology has changed from negative to positive in just the last couple of weeks.

The surge in the drug and biotech stocks is important since it has provided an additional impetus for the broad market to maintain its upward course.  As I wrote in Monday’s report, it should allow the market to “keep making higher highs this month before a potential (and expected) volatility increase later this summer as the yearly cycles bottom.”

[Excerpted from the June 20 issue of Momentum Strategies Report]