Rotation Roulette Lands on Biotech as Another Sector Spoils Rout

  • Health care only bright spot in S&P 500 in Tuesday trading
  • New breakthoughs help an industry criticized for drug prices

The role of sector rotation in restraining market volatility has been on display since technology stocks turned turbulent two weeks ago. When one sector falls, another compensates, and the VIX holds at 10.

Health care stocks are the offset du jour, notching a 0.6 percent advance that was the bright spot in a market where almost everything else is falling. Pacing gains were biotech firms, with rallies exceeding 3.8 percent in Regeneron Pharmaceuticals Inc. and Alexion Pharmaceuticals Inc.

Suddenly, bulls are in love with an industry where concerns over drug pricing have sent biotech shares down as much as 40 percent from the 2015 peak. While risk lingers with President Donald Trump mulling executive actions to lower costs, breakthroughs such as Clovis Oncology Inc.’s cancer treatment are renewing investor interest.

"Investors believe there’s probably less risk with some of the Trump initiatives with pricing, and there may be some rotation back into the sector because of the underperformance over the past 18 months," CFRA analyst Jeffrey Loo said in a telephone interview. "Combine that with some positive clinical data last week."

The Nasdaq Biotechnology Index rallied 2.3 percent as of 1:30 p.m. in New York, countering a 0.4 percent decline in the S&P 500. A divergence that wide hasn’t happened since April 2016, data compiled by Bloomberg show.

It’s been a hallmark of the stretch since June 9 that when one industry falters -- usually tech -- another is there to pick up the pace. Money initially found its way to financial shares and small-cap stocks. But with today’s rally, health-care companies have surpassed banks as the leader since the Nasdaq 100 had its worst day versus rest of the market since 2008.

As buyers jump from industry to industry, the links between stocks have loosened to one of the lowest levels since 2014. The average 20-day sector correlation, or the degree to which they move together, is approaching 0.5, down from above 0.7 at the start of the month, data compiled by FBN Securities show. A reading of 1 means they move in tandem.

The rotation has helped the market avoid deeper losses. With a peak-to-trough decline at 2.8 percent, the S&P 500 is on course for one of the smallest annual drawdowns since 1928. The CBOE Volatility Index has averaged 11.6 this year, compared with a historic mean of 20.

Below are some latest developments that have helped bolster biotech shares.

  • Positive surprises from clinical data include: Clovis Oncology Inc.’s ovarian cancer drug, Rubraca, Loxo Oncology Inc.’s cancer medicine targeting rare mutation
  • Investors have become more comfortable with drug pricing risk. In a recent survey conducted by Goldman Sachs Group Inc., a majority of respondents said that the risk is already priced in stocks
  • Novartis AG Chief Executive Officer Joe Jimenez and Allergan Plc CEO Brent Saunders said that they anticipate Trump, a frequent critic of industry pricing practices, to take steps soon to address high U.S. drug costs.
  • Regeneron’s Dupixent is closely watched by investors with analysts forecasting that the drug may be primed for one of biotech’s "most successful launches ever;" Scripts continued to rise in Week 11 of sales, according to a weekly update from Guggenheim.
  • Positive surprises from clinical data include: Clovis Oncology Inc.’s ovarian cancer drug, Rubraca, Loxo Oncology Inc.’s cancer medicine targeting rare mutation and Incyte Corp.’s IDO inhibitor.
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