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Biotech Conversation


Thanks guys!


Editor's Note: The following exchange between David Miller and Jason Goepfert was taken from today's Buzz & Banter. We share the vibe with those who have yet to discover the joy of Buzz.

Biotech breadth as we sashay towards the contra hour smells like something died in the brew vat. 34 up, 2 sideways, and 122 down. The IBB is underperforming the BTK. My guess, not advice, is we're going to test again that uptrend line off the 8/9 and 10/25 closing prints. The last two times we tested the trend line, the NBI was closer to oversold than overbought. Not this time. In the last eight trading sesions, we've closed at or darn near that uptrend line three times. So, keep NBI 715 in mind.

-- Prof. Miller

David, what I find interesting re: biotech is the level of assets at Rydex in their Biotechnology fund. The NAV of that fund tracks the BTK very closely, and I find that it's a good proxy for trader sentiment in the group.

As of yesterday, assets in the fund were just above $100 million, one of the very lowest readings in the past five years. Really the only times assets in the fund have been this low were July 2002, March 2003 and August 2004 - all good times to be buying the BTK.

For comparisons sake, the recent asset levels compare to the $1.3 billion that was invested in the fund at the peak in March 2000. Perhaps because biotech (in general as reflected by the BTK) hasn't gone much of anywhere in a year and a half, we are approaching the apathy stage with investors that can lead to better longer-term gains?

-- Prof. Goepfert

Jason, as long as nobody here takes the following as advice, the answer to your question is yes.

Bullish sentiment in the biotech space is at a low. Bears have had several high-profile wins that have emphasized how much easier it is to play the short side. A leaderless FDA plagued by drug recalls is also making people very nervous. Dozens of partnership agreements expected to take place in the last 12 months have not materialized.

Matched against that is $80-90B in cash at big pharma available to plug the serious holes in their pipelines. Also present is high short interest, which clearly won't matter until the psychology shifts.

For whatever it's worth, and given our team's performance over the last nine months it may not be worth much, we've been adding exposure in our model portfolio since mid-January. It's been painful (every add is underwater), but we believe the long-term prospects are good. It's not for the faint of heart, however, and the action between now and the "long term" likely involves much pain.

-- Prof. Miller

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