Is sentiment for biotechnology really the worst of all worlds? asks sector expert John McCamant; here, the editor of The Medical Technology Stock Letter looks at the sector from a historic, technical and sentiment based view.

It is one thing if biotech stocks are suffering because of a lot of bad news and events specific to the sector. It is another if interest rates — after historic lows (i.e,. ZERO) — continue to rise for the foreseeable future.

With a large list of bad binary data and regulatory events in Q4:21, we got the former. And with rates moving steadily higher — but still quite low by all accounts — we are getting the latter. 

Taken together, the SPDR S&P Biotech ETF (XBI) easily broke below the long-term 200-week support for the first time since the pandemic originally hit the markets in March of 2020. The selloff since February 2021 has also been the longest drawdown period in history for the XBI.

In times of extreme market duress — and this is no doubt one of those times in biotech — there is an understandable shift to quality. Currently the vast majority of biotech stocks are an afterthought, source of funds, and the like — even when stocks trade at or below cash.

Our universe of recommendations consists of a mix of Top-Tier later stage firms such as Biomarin Pharmaceutical (BMRN), Incyte (INCY), Ionis (IONS) and Pacira Biosciences (PCRX) and what we believe are high quality early and mid-stage companies.

As a reminder, the Top Tier stocks in our universe were once smaller, earlier-stage names too, when we first assumed coverage. We analyze and stay on these stocks closely for years, sometimes decades.

We see similar prospects for all of our names, with Acadia Pharmaceuticals (ACAD) and Myovant Sciences (MYOV) as solid examples of recently FDA approved, future home run, multi-indication compounds (i.e., pipelines in a pill). Our newer calls of Celldex Therapeutics (CLDX) and Madrigal Pharmaceuticals (MDGL) are right behind.

We remain steadfast in our recommendations driven entirely by long-term company fundamentals and not by overall market conditions. We understand the difficult market conditions and they are certainly gut wrenching.

In this bearish tape, there will be a rising scrap heap of junky, poor quality companies but they are not ours. All of our recommended names are fundamentally intact, well-financed and on schedule with their clinical and corporate timelines.

Technically, however, there is no support level now. The biotech knife is still falling. The XBI closed at $92. We previously said the index had to hold $104 — that was the all-important 200-week moving average that had not been violated since the very beginning of COVID (3/20). It sliced through the level like a hot knife through soft butter.

For the short-term, the 50-day MA is below oversold levels and both daily and weekly indices have negative, downward slopes — another poor technical sign. Moreover, there is no bottom support level on the charts. We have now also seen the close of Assymetry Capital, a ~$500 million hedge fund. Are others on the way?

Volume has picked up, too, which could mean a bottom may be nearing but with rates rising steadily risk is still off across the board. It is officially a bear market for bios (if not the entire the market as well.)

The weekly XBI is also in no man’s land and oversold. The carnage over the past 12 months has been historic and catastrophic overall, with the XBI peak to trough a disastrous 47% drawdown. Watch the XBI to attempt at creating a floor. In other words, stocks need to stop going down before they can go up again.

Most investors believe that, in this currently severely depressed stock market, merger activity would help stem the tide and begin to create a floor under the XBI. There is no doubt that Big Pharma cash coiffures are stronger than ever with roughly $250 billion on their balance sheets.

While there is a lot of pain to recover from, it will be interesting to watch for add bolt-on or even major takeovers of low priced biotech compounds and/or platforms to their pipelines.

Meanwhile, we stay on top of our positive company fundamentals and continue to recommend the majority if not all of our stocks at these very depressed levels. In most cases, we can calculate the value of a successful new drug, the demographics demand them and we believe that amount is more than the market is currently paying.

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