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Relative strength



It was an ugly day in biotech yesterday with only 38 of 163 stocks in the NASDAQ Biotech Index (NBI) posting gains. The NBI is probably one of the places that will outperform any macro dissembling from here (I should note that would be unusual since the NBI's beta means it just goes beyond what the overall trend is, so recognize the element of personal opinion in that statement). Inside this universe, I think it is instructive on destructive days to see what gained and why.

I'll run through the top fifteen (or so) to give you some flavor.

Vivus (VVUS) was up 18% on news its impotence drug had good efficacy.

Genitope (GTOP) was up 8%, bouncing off recent support. The impetus for the gain is unclear, though it might have something to do with the fact it was listed on the SHO Threshold Securities list as a stock with high outstanding naked short position.

Penny stock Genelabs (GNLB) was up 7.14% to $0.60, making for a second day of gains on news Prestara for preventing bone loss in lupus patients was still an Orphan Drug despite failing a clinical trial.

Ista Pharma (ISTA) was up 4.4%, the latest in six straight high volume up days.

Epix Pharma (EPIX) was up 4%, making the largest volume up move of six straight up days. Epix is locked in a rather unbelievable battle with the FDA. After multiple successful trials, most done with FDA guidance, the company still cannot manage to get the FDA to approve their contrast agent.

Xoma (XOMA) was also up 4%, benefiting from a string of licensing deals and initiation by the biotech analyst at Wells Fargo.

Neurochem (NRMX) was up 3.4% on what looks for all the world like a delayed-past-expiration reaction to good news from their DSMB. This is a heavily shorted stock (in the top ten of NBI stocks) measured by percentage of float.

Nabi BioPharma (NABI) was up 2.8% in a continuing series of good days post the Pfizer (PFE) purchase of Vicuron (MICU). Nabi also focuses on anti-infectives both in the form of therapeutics and anti-bacterial preventative vaccines. Nabi is on our coverage universe.

BioMarin (BMRN) was up 2.31% on a continued halo from a recent FDA approval, a positive change in their board, and the announcement of marketing commencement of the recently approved drug. BioMarin is in our coverage universe and is owned by members of our Research Team.

Invitrogen (IVGN) was up 2.2% a day after closing a $350M convertible note deal.

Amylin Pharma (AMLN) was up 1.9% on a continued rebound after the launch of their anti-diabetes drug Byetta. I note Amylin is in the top 20 of NBI stocks ranked by percentage of their float short.

Able Labs (ABRX) was up 1.9% on a dead cat bounce (sorry Gwen and Ellie and Phoebe).

Mannkind (MNKD) was up 1.8% on another bounce from recent lows after two recent analyst downgradings and a bear graphic during the "Lightning Round".

PAREXEL (PRXL) up 1.8% as the company's stock continues to recover after lowering guidance earlier in the year. I should note the company's book/stats unit published data showing a record new number of clinical trials (542) were launched in 2004 up from 391 in 2003. The previous record was 441 in 1998.

Cypress Bioscience (CYPB) up 1.7% as the company continues a very nice upward move off the April biotech sector low point.

Pull up any decent charting program and you can see the remaining 23. What am I interested in as I scan through the list? Not what you might expect. I'm not looking for stocks reacting to the day's news. Those are trades I probably already missed. I'm looking for stocks moving on no news or on news that happened a few days to a couple of weeks back.

Once I narrow that list, I'll look to make certain the stocks aren't running into any binary event by examining the company's timelines. Worst thing that can happen to you when playing the relative strength game is to be blindsided by some binary event that everyone in the world knew about but you.

Then I'll do some chart reading. Is the stock overextended? How has the buying power been? Short interest?

If everything lines up, consider the next step. If you are a trader, perhaps that means writing down your risk analysis and position strategy then initiating a position. I'm not a big fan of short-term investing in biotech (I think it is too hard in dev-stage names), so I use this list as a basis for research ideas. I'll take a quick look into the fundamentals of the company to see if it is something that fits my investment thesis.

While you're letting the computers help to take care of limiting your capital losses on big down days, use your brain to find stocks that can help you when the market turns back around.
No positions in stocks mentioned.

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