After Years of Underperformance, Is the Biotech Sector Finally Ready to Shine?
Rotational action is picking up traction as the Mag 7 names struggle. Here are two names that could benefit.
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Market action is mixed on Wednesday morning, but there is strong rotational action, with the Nasdaq 100 QQQ down 0.7% and the Russell 2000 ETF IWM up 0.6%. Breadth is positive with around 4,900 gainers to 4,250 decliners.
Alphabet GOOGL and Advanced Micro Devices AMD are the weakest names in the Nasdaq 100, but the Magnificent Seven MAGS continues to lose its mojo and is down 1.8%.
The good news is that the mega-caps are not dragging down the entire market. Money is rotating into small names, and there is quite a bit of positive action under the surface. The business media tends to do a very poor job of reporting this sort of action because it focuses almost exclusively on the major indexes. The thinking is that if the big indexes are trading lower, then the entire market will be struggling.
In the past year, there have been several periods of rotation into smaller stocks, but none have lasted very long and they ended with a thud.
Conditions currently look much better for rotation now as the market seems to be embracing the idea that many mega-caps are expensive and extended while many smaller stocks are not.
One sector I’m watching very closely is biotechnology. The group peaked in September 2021, hit bottom a year later, and has been churning for over two years now. Many biotech names have hit new lows in the past month.
Recently, there has been increased chatter about large pharmaceutical plays like Merck MRK and Pfizer PFE being in the market for an acquisition to replace maturing products. A deal or two in the sector will ignite speculation over other plays.
If you have been following my comments, then you already know that I have a bias for the biotech sector. My top play for the year, Rocket Pharmaceuticals RCKT, is finally starting to turn up and has made a higher high off the lows. Another favorite, Xeris Biopharma XERS, has had very strong technical action and is likely to announce phase 1 studies for a new drug with a $1 billion market.
Rotational action can be quite bumpy and inconsistent, but catching a theme at an early stage is one of the best ways to produce big returns.
At the time of publication, Rev Shark was long RCKT and XERS.
