Biotech Is the Worst Group in This Terrible Market. And Contrarians Are Watching.
Is the sector close to a washout? There's nothing wrong with the fundamentals of these names aside from being in the wrong group.
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Market action is poor again on Wednesday, but there are a few pockets of better action in the Magnificent Seven MAGS, which is up about 2%, and a few other names like Delta Air Lines DAL and Walmart WMT.
There is still very little interest in speculative names, however, with just a dozen or so small-caps up more than 10%. The Russell 2000 is lagging the other indexes, and that is keeping breadth negative.
The tariff issue continues to produce a mountain of uncertainty. A big part of the problem is that it isn’t very clear what the ultimate goals of the Trump administration are. The market assumed that Trump was seeking an even playing field, but what he really wanted is to equalize trade. There is the presumption that a trade deficit is a negative when it is really just a function of the free market.
Yes, there is a lot of cheating and unfairness, but at its core, the reason that a country like Vietnam has a giant trade deficit with the U.S. is because labor is cheaper there than it is in the U.S. That can’t be changed. It is pure supply and demand. There is no supply of workers in the U.S. willing to make shoes for $2 per hour. Trying to restructure the economy so that factories that use cheap labor move to the U.S. is an impossible task. That is why the market is reacting so poorly to using tariffs as leverage.
It is going to take a while for this to resolve, but the one certainty about the market is that it is cyclical. The worst groups will eventually recover and enjoy a period of prosperity.
Worst of the Worst
Currently, there is no group that is worse than the biotechnology sector. It has been under pressure for years and has been hit over and over again on issues such as Robert F. Kennedy, Jr. at the FDA, and now it is suffering because of tariffs on pharmaceuticals that will have little impact on most of the group.
The group has been so bad for so long that some of the funds are being liquidated, creating even more pressure. From a contrarian standpoint, the action and sentiment are so poor that it can’t become much worse.
I try to avoid the game of calling bottoms, but I’m hearing more talk about biotech being close to a washout. It may take a while, but the SPDR S&P Biotech ETF XBI is down another 4% Wednesday and approaching the last major low that it hit in late 2023.
Names that I follow in the group include Xeris Biopharma XERS, BridgeBio Pharma BBIO, Humacyte HUMA, Mereo BioPharma MREO, Ocular Therapeutix OCUL, uniQure QURE, TG Therapeutics TGTX, Viking Therapeutics VKTX, among others. What is most notable about all these stocks is that they have generally positive news. There isn’t anything wrong with the fundamentals aside from being in the wrong sector.
Sooner or later, the cycle will turn, and the biggest losers will attract more interest, but currently, there is no bottom in sight.
At the time of publication, Rev Shark was long XERS, BBIO, HUMA, MREO, OCUL, QURE, TGTX and VKTX.
