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Cancer stocks lead biotech rally?


Careful what you wish for!


I was chatting with a friend last night and we were discussing how nice it was to have green screens for a change. It's five months into what is a not particularly fun year for those of us concentrated on the biotech sector. The early-year rally we normally get never materialized, but the traditional "sell ASCO" mantra sounded like it was still in place.

We saw signs of buying in the section last week, but with all the macro market's self-flagellation it was tough to figure out what was really going on. This week, however, it's damn obvious: Buyer's have abandoned their reluctance to buy biotech. What we suspect was relatively modest buying triggered obvious short covering in several stocks and the biotech indices burned higher.

I commented earlier in the week the performance of the dev-stage companies was much better than the index as a whole. Frankly, that surprised me a little since a return of buyers usually is felt in the bigger names first. Perhaps it was the fact those bigger names have outperformed the smaller names all year, I thought.

After talking with a few folks yesterday about what was green, I noticed a common theme: Cancer stocks. Since the ASCO meeting starts one week from today and 18,000 people are carrying around a three-inch-thick book full of inside information (the bad kind) on these companies. That made sense to me.

So, I ran a table of the companies in the NASDAQ Biotech Index (NBI) that have cancer programs. I don't claim to have caught them all since it was a quick scan, but I think I got the major ones.

As you can see, the correlation here isn't perfect and the purchasing was selective. Not all of the NBI's cancer companies had great weeks. I tossed in the float short interest to see if that was perhaps a driver, but it really wasn't.

The table does indicate a select group of cancer stocks is rallying hard. That differential was much more obvious yesterday than is indicated on the above table, which uses 5-day percentage gain data.
Is it any surprise this is not a clean answer? Not in this market, no.

Despite the lack of a clear correlation from the data, my gut tells me this rally has an ASCO flavor to it. If my gut is right, I want to make a couple of points here:

First, this ASCO buying thing (if that's what is going on) is a sketchy affair this close to the meeting. Remember that 18,000 ASCO members have material, inside information in their hands about many of these companies. They have had it since late last week, which means Wall Street has been trading off that inside information since late last week. That said, I know what to expect from a fair number of those companies (in general terms only since I'm not one of those 18,000 insiders), and it looks to me like any pre-ASCO buying was not abstract related. Someone large (or a collective of smaller someones) picked a few cancer stocks to buy and we got a decent run that spilled over into the rest of the sector.

Second, and most importantly, I have to wonder if this is a two-week trade. In two weeks, ASCO will be over and in the past. Will the typical "sell ASCO" trade return at that time? Or is the action this week just typical of a bottom and the caner stuff was first on the list? I really like some of the names on that list (we cover seven of them and "follow" two others) and would like to think the rallies in those names, at least, has some legs.

I wish I had better answers for you. At this point, the best I can do is share the fact my gut detected a cancer theme in the rally thus far. If this nascent biotech rally has any legs, then the names will need to broaden to the other 100 or so names in the index lest the "sell ASCO" theme derail the rally two weeks hence.

DNDN, CTIC (straddle), SGEN

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