Time To Load Up on Biotechs?

Fred Imbert of CNBC reports, Relax, we're about to hit the bottom in stocks:
U.S. stock investors take a breather. The market is nearing its bottom, Jeffrey Saut, chief investment strategist at Raymond James, said Friday.

"Our timing models call for a low between Aug. 13 and Aug. 18, with a plus-or–minus three-day margin of error, so today it feels like capitulation," Saut said in a CNBC " Squawk Box" interview.

Saut made his remarks after U.S. equities recorded their worst trading day in about a year and a half. The Dow Jones industrial average fell nearly 360 points, while the S&P 500 turned negative for the year, as a massive fall in oil and global growth concerns weighed on investor sentiment.

"We're nearing the bottom. We knifed through the July support yesterday. It was pretty ugly. You would look for some kind of bottom either sometime today or the middle of next week," Saut added.

"I've been in this business for over 45 years and I've seen this act before," he said. "It's kind of like pornography. You know it when you see it."

Todd Gordon, founder of Tradinganalysis.com, also said in the same interview that investors need to relax.

"What has happened really? Has any real damage been done to the uptrend in the market? I'm not so sure. I mean, we have China falling down, emerging markets are seriously on the brink of another extended leg down, but there's a lot of talk that the [upward] trend has been broken, and I don't think there's any significant technical damage done," Gordon said.

"The stock market has done nothing but flatten out, which has allowed those longer-term moving averages to kind of play catch-up," he added.

Nevertheless, Saut of Raymond James also said it has been a while since he's seen this much fear in the market. "I have not seen this much fear since the spring of 2009, and we're only 4.5 percent off of the highs," he said.
I agree with Jeffrey Saut, it's been a terrible and downright ugly week in stocks but the panic has been way overdone, no doubt exacerbated by computerized program trading. The worst possible thing institutional and retail investors can do now is to throw in the towel and sell in a panic.

Thursday sure felt like a capitulation day but only time will tell. Overnight, we got more bad news out of China after a private survey showed the factory sector shrank at its fastest rate in almost 6-1/2-years in August, hammering global stocks and commodity prices, but European stocks pared losses after diving at the open.

The scariest thing I read last night (you should follow me on Twitter) was that Japanese Finance Minister Taro Aso on Friday warned China against frequent manipulation of yuan rates, saying that Tokyo would face a tough decision on how to respond to any such interventions from Beijing.

The last thing we need is an all-out war between China and Japan on currencies, which will only intensify global deflation fears and make the Fed's problem that much bigger.  

But even I think deflation fears are way overblown at this time and too many people are getting too edgy over nothing. Even in China, some think we're overreacting to the bad news. In his latest Telegraph comment, China's August scare is a false alarm as fiscal crunch fades, Ambrose Evans-Pritchard notes:
China is becoming a fortress economy like the US, moving to its own internal rhythm. This is unpleasant for countries like Brazil that make a living supplying China with raw materials, but not for China itself. As Stephen Jen from SLJ Macro Partners puts it, the Chinese downturn is "soft on the inside and hard on the outside."

Nor is there any need to risk a currency war. The economy has been generating 1.2m jobs a month this year. There are still more vacancies than candidates.

The offers-to-seekers ratio has risen from 0.65pc in the early 2000s to 1.06pc. It has come down sharply this year - and needs watching - but the flood of migrant workers from the countryside has dried up as China's passes the "Lewis Point". The wages of migrant workers are still rising at a rate of 10pc. The labour market is tight.

None of this is to say that China's economy is healthy. Credit still rising by seven percentage points of GDP each year, pushing the debt ratio ever further into the danger zone. It will be 270pc by next year. This will end badly.

But China is not in immediate crisis. The Reserve Requirement Ratio (RRR) for banks is still 18.5pc. The PBOC can slash this to 6pc - as did in the late 1990s - flooding the system with $3 trillion of liquidity. It can even go to zero in extremis.

The time to worry is when China has exhausted this last buffer. This August scare of 2015 is a false alarm.
I actually think the next big surprise out of China will be a big rate cut and global markets will rally sharply following this news (see my comment on Bridgewater bearish on China for more details).

All this to say that now is the time to load up on risk assets. Where am I focusing my attention? Where else, the big dip in biotech shares (IBB and XBI). They were decimated this week as the algos clobbered all high beta stocks.

But this is where the big money will be made going forward. Just have a look at this chart of  Intrexon Corporation (XON), a favorite of Legg Mason's Bill Miller, the mutual fund king who made an impressive comeback (click on image):

The stock plunged this week and is now close to its 200-day moving average. I guarantee you Bill Miller is loading up some more here and so will other smart investors.

I can show you much uglier charts of other smaller biotechs like Catalyst Pharmaceuticals (CPRX), one of my core long holdings (click on image):

Or look at this chart of Juno Therapeutics (JUNO) which is a fun stock to trade if you're a bit nuts and risk-averse like me (click on image):

I've become so desensitized to these big biotech dips. Remember the big unwind back in April, 2014 when everyone was warning you to get out of biotechs? I ignored the press and told you to buy that big dip and I'm telling you once more, buy this big dip in biotechs. I will even provide you with a few stocks to look at below (click on image):

Disclosure: From these names, my favorite core holding is Progenics (PGNX) but I'm also long Catalyst Pharmaceuticals (CPRX) and Idera Pharmaceuticals (IDRA). The latter two have been beaten down hard but all these stocks above are way oversold and will bounce back strongly in the weeks/ months ahead. Also worth noting La Jolla Pharmaceutical Co. (LJPC) was recently granted orphan drug designation for two novel compounds for fibrodysplasia ossificans progressiva (FOP).

That is it from me this week. I'm going to have fun looking at all risk assets on Friday, not just biotechs. Below, I embedded a few clips on these markets for your viewing.

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