IBB - Stealth Bull Market Unfolding

The iShares Nasdaq Biotechnology ETF (IBB) which serves as a proxy for the biotechnology cohort has finally broken out to a 52-week of $122 against its 52-week low of $100 in May. This 20%-plus appreciation over the summer has largely gone unnoticed while some individual companies have soared even higher over this same period. The biotechnology cohort has been decimated over the past 2-plus years over the drug pricing debate while serving as a political punching bag. To be fair, the entire pharmaceutical supply chain became a victim of harsh political rhetoric as share prices fell across all companies involved in this space in any capacity. The biotechnology cohort has been largely ignored in this massive bull market and appears relatively cheap in comparison to other sectors. As the confluence of abating political threats, drug pricing certainty, merger and acquisition activity and continuity of the current health care backdrop, this cohort has witnessed a stealth bull market. This uptrend is likely to have legs as valuations remain compelling and many names have become value stocks.

Furthermore, as the raging bull market continues into frothy territory, downside risks continue to mount. Bank of America is predicting an end to the current bull market run and in less certain times pharma companies will benefit. Individual names within the sector have demonstrated incredible strength as of recent such as Regeneron (REGN), Bristol Meyers (BMY), Allergan (AGN), Celgene (CELG), Johnson & Johnson (JNJ) and Amgen (AMGN).

Challenging 2016, Recovering 2017 and IBB’s Resurgence in 2018

After a banner year in 2015 for the biotech ETF, the cohort sold off in a dramatic fashion falling from $138 to $89 or a 37% decline. The healthcare sector had been faced with an uncertain and volatile political backdrop. As President Trump and other political pundits vowed to bring down drug prices and increase scrutiny over the sector, IBB found its footing and set a floor near the $89 level. The ~$90 level was tested a handful of times in 2016, and it was evident that many of these political threats were being priced-in after its sharp and sustained sell-off. This sharp decline and subsequent floor coincided with heated political rhetoric aimed at the collective cohort of healthcare and more specifically biotech companies. I strongly felt that these events were extraneous and would eventually subside without any significant impact on the underlying stocks within IBB. I felt this politically induced sell-off presented a great buying opportunity considering the ~40% decline and extraneous pressures. I had written about such opportunities throughout 2016 during the market sell-off and the Brexit, respectively (Figure 1). I felt that these were great entry points for any long-term investor that desired exposure to the biotechnology sector. Ostensibly, many of these stocks were trading at multiyear low P/E ratios and as a cohort (gauged via the IBB proxy) looked to be less sensitive to tweets/threats as IBB continued to test the ~$90 barrier throughout 2016. 2017 saw a nice recovery and posted a ~20% gain, and 2018 is shaping up to posting another double-digit annual return thus far the index is up ~14% YTD. Biotechnology remains one of the few sectors that money has yet to rotate into now that retail has caught fire.
Continue reading "IBB - Stealth Bull Market Unfolding"

Oil Price Spike Will Most Likely Be Averted

Uncertainties for the balance of 2018 imply that stocks could fall sharply or be adequate. As a result, prices may spike or drop into the $50s, depending on what unfolds.

President Trump has sway over Saudi Arabia and the other Gulf producers. He can also fine-tune the implementation of sanctions on Iran and waivers to them. I’m expecting he will do whatever he has to, to avert a price spike going into the November mid-term elections.

July Production Changes

OPEC estimated in its August Monthly Oil Market Report (MOMR) that its crude production in July averaged 32.323 million barrels per day (mmbd). That was about 40,000 b/d higher than in June. The “compliance” level with the 2016 deal dropped to 97%, the first time less than 100% in nearly a year.

Saudi Arabia’s production was reduced by about 52,000 b/d, but that was more than offset by gains of 79,000 b/d in Kuwait and 69,000 b/d in the UAE.

Iran’s production fell by 56,000 b/d while Venezuela’s output dropped 48,000 b/d. Libya’s output also dropped by 57,000 b/d. Continue reading "Oil Price Spike Will Most Likely Be Averted"

Should The Fed Be Above Criticism?

I suppose it was just a matter of time, but Trump Derangement Syndrome (TDS) finally hit the bond market last week.

According to some experts, last week’s nearly 10 basis point jump in long-term Treasury bond yields was at least partially due to the president’s unprecedented and impertinent statement that he didn’t like the fact that the Federal Reserve was raising interest rates.

For the past two years, the financial markets have been an island of blissful ignorance, totally disregarding all of the nonsense swirling around the White House, whether real or invented. The S&P 500 has risen about 30% since Donald Trump’s election despite all of the clouds hanging over his presidency, from alleged collusion with the Russians to the Paul Manafort thing to Stormy Daniels to surrendering American sovereignty to Vladimir Putin.

But now apparently the president has finally stepped in it deep enough to rattle the markets.

Last week the yield on the benchmark 10-year Treasury note rose seven basis points to close the week just below 2.90%, its highest weekly close in a month. The yield on the 30-year bond jumped 10 bps to 3.03%, its highest level since June 26. According to the Wall Street Journal, some of that rise was due to Trump’s comments about Fed policy, neglecting to mention that the yield on the 10-year German government note – the European benchmark – was also up sharply last week, up nine bps on the week to 0.37%, its highest level since June 20.

So what did Trump say about the Fed that was so disturbing that it led some bondholders and traders to dump Treasury bonds and German Bunds? Continue reading "Should The Fed Be Above Criticism?"

Who's Winning The 'Trade War'?

Just how crazy is Donald Trump?

Back at the beginning of March, the president famously tweeted:

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”
- President Donald Trump

You probably don’t remember what the exact reaction to that was, but you can probably guess it involved hoots of derisive laughter. After all, the idea of the president of the United States upsetting the world apple cart by supposedly starting a trade war with China and our biggest trade partners and closest allies was the height of lunacy.

But who’s laughing now? Continue reading "Who's Winning The 'Trade War'?"

Copper To Retest $1.94 After Breaking Support

Last September I posted a monthly chart of Copper futures to warn you that the metal has been approaching the area of strong multi-year resistance. In that very same post, I set specific triggers to watch for further price action.

Recently, one of those triggers was broken, and now it’s time to update the chart.

Chart. Copper Futures Monthly: Crucial Support Was Broken

Copper
Chart courtesy of tradingview.com

The global chart structure hasn’t changed, and I posted its full reconstruction adding some new annotations to highlight the most recent price action. Continue reading "Copper To Retest $1.94 After Breaking Support"