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Are Biotech Stocks Overdue for a Summer Pullback?


The sector is outperforming its usual seasonal swoon; how long can the rally last?

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Seasonality is not a guarantee in most investment sectors, except perhaps in energy and retail. It's certainly not in biotech, where the seasonality is more a function of the investor base than anything to do with the companies. That said, if you look at a chart of biotech over the last decade, you'll see summer flattening or pullbacks enough times to recognize it's a thing you have to account for when managing a biotech portfolio.

As I've noted before [subscription required], everyone expected a summer swoon in biotech. When everyone thinks something will happen, that's a warning signal. With that caveat in mind, I sense more than a few folks in my chosen space are wondering when the sector is going to pull back. Personally, I thought the break would come after last week's quad-witching. And while the indexes have been middling very recently, take Vertex (NASDAQ:VRTX) for example, you can't look at the iShares NASDAQ Biotechnology Index ETF (IBB) or the SPDR S&P Biotech (XBI) and see anything resembling a June Swoon.

Five of the planned biotech IPOs for this week got postponed until, believe it or not, next week. I just shake my head at the idea they might have better luck in a vacation week, but more power to them. This could be an indication that biotech is moving into a resting period. That said, there is clearly a quality issue with some of the names that tried and didn't make it.

The combination of a lack of scientific conferences (and news flow) in the summer and portfolio manager vacations are likely causes of the biotech sector's traditional summer weakness. Since nearly everyone I know is headed out of town at some point in July, perhaps all things have aligned to see what June did not bring us. A less poetic-sounding July Swoon, perhaps?.

Biotech funds are tidying up their portfolios for quarter-end and gazing at the day-end Russell Rebalance with a wary eye. While volume is likely to look high today, it's all machines and matching instead of strategy. The couple of traders I've spoken with today say their desk has been as quiet as a church mouse.

One more weekend and one more trading day left in the quarter. I hope it was a good one for you.

Twitter: @AlpineBV_Miller

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No positions in stocks mentioned.

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