Buyers triumphed again Monday, putting bears in a pickle, states Jon Markman, editor of Strategic Advantage.
In our biweekly deep dive on tech, we introduce a company focused on diagnosing cancer via a blood sample.
InsightDuring the past five sessions, bears have suffered a rough ride. Discomfort intensified Monday as the S&P 500 (SPX) rallied to 4,111, a further gain of 1.1%.
Since the lows a week ago the benchmark index has bounced 5.8%. More importantly, all of those gains have come despite surging short-term interest rates.
The yield for the Ten-Year Treasury Note (TNX) on Monday hit 3.35%, the highest level since June. Investors are taking in all of the bad news, then buying more stocks.
I didn’t see this rally coming. I assumed bears would reload short positions in the S&P 500 on the rally back to the 50-day moving average at 4,035. A retest of the June lows at 3,640 seemed assured, coinciding with the last time the ten-year yield moved above 3.25%. Instead, bears have been scrambling to cover short positions for a week. It is hard to explain, but we must pay attention to the tape and not just grouse about it. The next overhead resistance level for the benchmark at 4,175 may be in play. We will know more Tuesday after the Consumer Price Index report. I am inclined to not chase the current rally and have one eye on the exit.
Strategic TradeWe are currently flat, with no positions. We might recommend new positions after the inflation news is published.
The BackstoryThe Dow Jones Industrial Average (DJI) climbed 0.7% to 32,383.18 and the S&P 500 was up 1.1% to 4,110.69. Energy, technology, and consumer discretionary stocks led the gainers, with all sectors in the green. Breadth favored advancers three-one, and there were 90 new highs vs 96 new lows. The leaders were Cigna (CI), ICICI Bank (IBN), Progressive Corporation (PGR), Sempra (SRE), and American Electric Power (AEP). Note that this is still a very defensive vanguard, which is kind of weird. You’ll know that there is a more sturdy platform for a rally if and when growth stocks take the wheel.
Data watchers’ focus on Tuesday will be the CPI for August. Consumer prices are expected to rise 8% annually, slower than the 8.5% pace in July, according to the Econoday consensus but still pretty freakin’ high.
Markets are seeking further evidence inflation has peaked in the US, though Federal Reserve officials said last week that more than a few months of consistently lower readings will be needed to assure that price increases have reliably slowed.
Analysts have reduced their estimates for third-quarter earnings growth by 5.5 percentage points since June 30, The Wall Street Journal reported Monday, citing FactSet senior earnings analyst John Butters. That's the biggest cut since the second quarter of 2020 when the Covid-19 pandemic and ensuing lockdowns brought economic activity to a standstill, according to the report.
In company news, RF Lafferty initiated Lucid Group (LCID) with a buy rating and a $19 price target. Shares of the electric vehicle manufacturer climbed 9.8% to $16.55.
Strategic Deep Dive: Blood Test for Cancer Gives New Life to Guardant Health Shares
Researchers are making real progress in diagnosing cancer with a simple blood test. It is a game-changer in healthcare and a big deal for investors.
Results published last week from a new medical study show that researchers have developed a DNA blood test that is 99.1% effective in screening for several types of cancer.
Investors should consider buying Guardant Health, Inc. (GH).
Screening for cancer with a simple blood test used to be the stuff of science fiction. So-called liquid biopsies, if accurate, could save millions of lives with early diagnosis, and reduce healthcare costs by billions through better resource allocation. The problem has been accuracy. Researchers worried about false positives—tests that detected cancer when there was none.
The Pathfinder study offered liquid biopsies to 6,621 adults aged 50 and over. The test was negative for 6,529 participants. Ninety-two study members, or 0.9%, returned positive results. And of these, 38% were later found to have cancer, according to results published at ClinicalTrials.gov.
More importantly, the liquid biopsy spotted ovarian and pancreatic cancers, typically only detected in their latter stages when survival rates are poor. Catching these cancers early provides the best chance of treatment.
Guardant Health is one of several companies pursuing a simple blood test for cancer. The Palo Alto, California-based company uses cutting-edge big data, machine learning, and genomic sequencing techniques to help clinicians diagnose cancer cheaper and more effectively.
In 2019, the company completed a hotly anticipated initial public offering. Even after investment bankers bumped the initial offing price to $19, shares still jumped 70% on the first trading day.
While the investment climate in 2019 was more favorable for growth companies, Guardant was a special case. Prior to its IPO, the firm had seven funding rounds and raised $550 million from venture capital heavyweights like Softbank, Sequoia Capital, T. Rowe Price, Khosla Ventures, and Lightspeed Venture Partners. Those investors saw the future of healthcare.
Helmy Eltoukhy, chief executive officer, promised a liquid biopsy that would ultimately allow oncologists to see all of a patient’s genomic information in one easy-to-administer blood test. The alternative is a tissue biopsy, which can be expensive and risky because those tests require a piece of the physical tumor for analysis.
In an interview with CNBC in 2018, Eltoukhy claimed a typical lung cancer biopsy costs $14,000 and has a complication rate of 19%. The same information can be gleaned from a Guardant test with only two teaspoons of blood. The low cost and convenience mean the test can be performed frequently to track how the tumor is mutating with medication and treatment.
Guardant’s secret is applying digital communication algorithms to the process of DNA sequencing. Whereas tissue biopsies look at the tumor only, this process reveals the entire genome. It also means the science works across all cancers. Additionally, Eltoukhy says machine learning, coupled with big data analytics, leads to 1,000X–10,000X error rate reductions.
It’s the kind of crazy progression that Guardant officials believe will unlock an $80 billion addressable market, according to a January investor presentation.
Guardant shares in the past were high flyers,
The stock soared in 2021 to $180. However, rising interest rates and investor skittishness about growth stocks in April sent shares reeling below $30. Since that time the stock has doubled, yet the best may be still to come.
Although there is more research to perform, the Pathfinder study validates the science of liquid biopsies. This should lead to new business models most investors can’t even imagine. Tests are likely to become commonplace to reduce healthcare costs, and save lives.
Guardant shares currently have a total market capitalization of $5.9 billion, and trade at 14.5x sales. The company logged $370 million in sales in 2021 and is not currently profitable.