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Did Biotech Just Bottom?


A beaten-down sector has a rare bright day.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time. Want access to the Buzz plus unlimited market commentary? Click here to learn more about MVPRO+.

The two big biotech ETFs, SPDR S&P Biotech (NYSEARCA:XBI) and iShares NASDAQ Biotechnology Index (NASDAQ:IBB), are solidly in positive territory today and holding onto their morning gains quite well.

Last week, biotech tended to start the day well before selling off, culminating with an ugly close on Friday:

A solid close today would imply that a great deal of the froth has been worked off, which would make sense given that XBI fell 18% from its March high.

Interestingly enough, at its $136.47 low on Friday, XBI just barely crossed the 20% mark that some people call "bear market territory." I don't know about you, but 20% doesn't feel much different than 19% or 21%. Anyway...

It's also worth noting that on Friday Bank of America Merrill Lynch reported huge outflows in health care/biotech funds, which is indicative of real fear among market participants.

This morning, I took a long position in Gilead (NASDAQ:GILD) through a calendar spread, selling the weekly $73 call and purchasing the April $70 call for a $2.13 debit. Though the stock is up since I made the buy, I'm flat on the position as I bid a bit too aggressively. The ideal situation is Gilead finishing just under $73 this week (rendering the short call worthless) and powering higher next week. But I'll be more than happy if Gilead shoots past $73 and I'm called out on the long $70 call.

But what's really frustrating was that on Friday at 3:59 p.m., I scrambled to get an order in but failed. I was under the assumption that if the sector was to bounce, Gilead would outperform given that the recent Congressional inquiry into pricing doesn't seem like a real near-term fundamental issue.

Given its 20% decline off the top, I thought we could see sell-side analysts come out to defend the stock, helping the case for a bounce. I think that's still possible, but for now the stock is just moving up with its peers.

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Twitter: @MichaelComeau

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Position in GILD
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