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Morning biotech notes


"Yesterday?" There's a lyric in there somewhere...

Ever been in one of those dreams where you trip and you keep falling and falling and falling even though you can see the floor right there? I suspect that describes Hoofy's Hump Day pretty well. The agony between the trip and the "thud" is wearing people out to the point where the pain of hitting bottom is actually preferable.

The bears think the thud is only the first of many declines as Hoofy crashes through floor after floor. "This time," Boo shouts, "all our ducks are lined up. We know our fears aren't causal of a market collapse, but they are accelerants and this time the accelerants will kick in!"

I'm not a big fan of leaving it at "it'll matter when it matters" but that pretty much describes things in the market right now. The bear case will matter 10-15% from here. The bull case will also matter 10-20% from here. People are fond of saying nobody rings a bell at the bottom, but I can't get it out of my head there will be an audible "SNAP" when the Minx decides which way she'll take us this time.

Until then, the computers are in command as they pedal furiously to keep their master's promise of "7%, no vol - Honest!"

Let's see where the pedaling took us in biotech...

The biotech sector has had an interesting week. On Monday intraday, the NASDAQ Biotech Index (NBI) broke through the 655 support level that had been so important in mid-March. It did stay about the 650 level I believe is the best summation of support in this area (round number, among other things). Breadth was a mildly stinky 67 advancers to 88 decliners. On Tuesday, the NBI gapped up and stayed up, never quite falling back to Monday's close and ending about two bits from the intraday high. Breadth was very minty at 111 advancers to 44 decliners.

That brings us to Wednesday. The NBI gapped up about $0.60 and then got progressively worse from there. Breadth ended up a very ugly 30 advancers to 123 decliners. While I was contemplating my red-dye screen, I noted volume wasn't particularly high. I Buzzed about it after the bell, saying I'd take a look and report back. Here I am.

Of the 159 stocks in the NBI, only 60 had an up-volume day (where Wednesday's volume was higher than Tuesday's). One was flat and the other 98 all had lower volume days. Of the 60 with higher volume, 25%. Of the 98 with lower volume, only 15% were gainers.

Perhaps I'm stretching things a little here, but it seems to me yesterday's decline was on overall lower volume than Tuesday's gains. This fits with the unusual relative strength I observed in biotech last week. While some of that was timely good news out of Genentech (DNA), it is rare when one company can save an entire 159-stock index - especially when it isn't even a member of that index.

As I also noted yesterday on the Buzz, the selling may have been coming from Henrys (my affectionate name for HNWIs or High Net Worth Individuals). I know a few stocks that are particularly sensitive to Henry selling and they were counter-trend decliners on Tuesday. A few stockbroker friends told me their phones were lighting up asking for sales. It's a small sample size, I know, but it's all part of the mosaic as far as I'm concerned. The more little tiles I can collect, the clearer the picture is for me.

So what do I think the big picture is for biotech? I shared this earlier and I have no reason to change my mid yet. I think it is unlikely we'll get away with the one break through 650 we saw earlier this week. I think if we hold that low at 636 then that will be test enough. I think barring any big shock from outside the sector, the sector is in a position to rally (not advice). That's important because the worst thing that could happen to biotech investors in 2005 is if big pharma starts throwing their $109B in repatriated cash around and everyone sells into the resulting sector strength.

Bottom fishers know darn well you pace yourself in this kind of environment because nobody ever calls the bottom exactly right except by pure coincidence. You hope your first buy is the worst and somewhere between 50% of your cash and 75% of your cash the market recovers (if I've got 75% in and no bottom, I get nervous).

Here's to hoping we get that thud today or we find out the thud was on April 4 and all we are hearing now is the echo...
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