WallStArb's blog

Summertime BAD for smallcaps and ESPECIALLY biotech. Most biotechs will peak about 2 - 4 weeks AHEAD of ASCO - except the names which actually release UNEXPECTED blockbuster type news. Most bios which have big runs from Jan/Feb into ASCO will lose all of the moves and even more the few weeks/months after ASCO.

The reason behind this is that most oncology related stocks save up all their data presentations for this - most will be "non events" - but the stocks move up in anticipation - sort of a buy the rumor - sell the news. The summer tends to be void of any significant large conferences and most companies won't have any major releases of news/data until mid/late fall. The lack of buyers into normal selling causes overreactions as the buyers for the "big news" become sellers and locking in profits. Liquidity is thin and normal buyers will tend to be less involved - causing any significant selling to result in bigger then normal price drops "for no apparent reason"

We got a VERY big SELL signal yesterday for the S&P (SPX) and I am taking some major short positons which we expect to have on for a few weeks - perhaps for the better part of the summer.

I mentioned last year (about 8 months ago) how 2009 was following the same pattern as the market in 2003 - similarly we are following 2004 so far in 2010

in a nutshell in 2004 we set a high in mid jan then had a big 7% sell off into mid/late Feb - we did the same this year.  In 2004 we then regained all those losses and got a slighlty higher high in March/April (it was less then 1% above the Jan highs).  Then we sold off fairly hard and while we had some bounces - we eventually set a low in July / August 2004 and it was about 12% +/- off the highs.  Which would put us in the 1020 - 1040 area IF we follow a similar pattern.

2009 has been following a very similar (ok its been identical) pattern to 2003.

All signs point to a deeper correction
The S&P 500 resistance at 1055-1065 was respected and the uptrend line in
place since the July low has been broken. Short-term indicators are approaching
oversold levels, but intermediate indicators remain overbought. More importantly,
our volume models remain negative - the Volume Intensity Model (VIM) continues
to point to more selling than buying. On October 1 the market sold off sharply
generating a 90% down day on higher volume – another sign the market is under
distribution (selling). Breadth is also not supportive with our advance-decline line
diffusion indicator never confirming the recent recovery highs. Risk measures,
such as the EURJPY currency pair, are pointing to further de-risking, and the ratio
of stocks versus bonds now clearly favors bonds.

If you're an experienced biotech investor or a novice - you probrably know and understand MOST biotechs are development stage companies.  This is Wall Street "speak" for they lose money and many of them are in a continual state of scrambling for cash.  When a company has great science but poor cash many times it's an unfortunate "trap" for the investor.  I am publishing some of our firm's research which is an "estimate" of current cash reserves and more importantly - NET CASH, which gives an idea how much the company has after paying off all debt and liabilities.