Biotech stocks are breaking out. How Josh Brown is trading them
(This is The Best Stocks in the Market , brought to you by Josh Brown and Sean Russo of Ritholtz Wealth Management.) Josh โ You probably hear Sean and me talk about gaps a lot. Gaps are information. They are the place on the chart where you can see buyers and sellers jumping ahead to a fast repricing, usually in response to company-specific news that suddenly and unexpectedly changes everyone’s minds. But not all gaps are the same. Edwards and Magee spent decades classifying them, and the most important distinction is between a breakaway gap and everything else. A breakaway gap comes out of a long base on heavy volume. Institutions have to own the stock. They are not going to wait around and hope for a pullback. These gaps do not get filled quickly. The bottom of the gap, which is the first price paid for a stock after the air pocket below it, becomes the natural stop for traders. Not because of the number but because a close back below it tells you the character of the move has changed. Merck (MRK) printed that kind of gap last week. As you’ll read about below, Merck and its partner Moderna reported Phase 3 results for a combination therapy that paired an individualized mRNA cancer vaccine with Keytruda in melanoma patients. It worked. Recurrence-free survival hit its primary endpoint. This is the first time an mRNA therapy and a checkpoint inhibitor have worked together in a Phase 3 trial for any cancer. Merck had been under pressure in recent years due to concerns about its pipeline and heavy reliance on Keytruda. This sudden repricing is telling you that the pipeline is now being valued more highly. The narrative is shifting and the sentiment is following. We’re also going to revisit biotech giant Amgen (AMGN) in today’s column. We showed you the stock earlier this year, and it’s been on a hell of a run. The rally was gradual at first, and now it’s got a head of steam. This happens with the names on our list all the time. Where Merck’s move happened in a single explosive morning, Amgen has been making its case quietly for most of the year. Same sector, different chart. Amgen is being noticed by people who haven’t looked at it in a long time. Sean’s got the usual Monday morning highlights from the list. I’ll be back with some technical commentary and risk management. As of Aug 24, there are 217 names on The Best Stocks in the Market list. Top sector ranking: Top industries: Top 5 best stocks by relative strength: Sector spotlight: Biotech Merck & Co., Inc. (MRK): Sean โ The big biotech breakout is fully on. XBI is up 34% YTD after gaining 36% last year, and single announcements are repricing entire categories of stocks. Let’s talk biotech. We wrote about Merck on July 6 as the poster child for the forgotten healthcare sector. The stock was printing all-time highs while the company reported a $4.2 billion GAAP net loss, and the point was that price was telling us something the fundamentals weren’t. It’s up about 15% since then and roughly 30% YTD. Well, we just got some meaningful fundamental news and the sector is no longer forgotten. Last Wednesday, Merck and Moderna reported that a Phase 3 trial of “intismeran autogene” combined with Keytruda (MRK’s big money maker) hit its primary goal of recurrence-free survival in patients with stage IIBโIV melanoma. It also improved distant metastasis-free survival, meaning it slowed the spread of the cancer. Intismeran is an individualized, custom therapy. They sequence the patient’s own tumor, build an mRNA vaccine against it, then pair it with Keytruda. This is the first Phase 3 win for that approach in any cancer. Moderna went up over 175% in a day, then gave back 20% of it Thursday. Merck closed at $152.20, an all-time high, and eased slightly the next session. mRNA-linked names added roughly $100 billion of market value on the news. Merck is the partner, not the pure play, so it didn’t get the massive move. But it did get validation of a new approach built on top of a key drug, which is good for the developer and for the patients. Last week was a great week for biotech. It’s a nice example that in this business, investor outcomes and patient outcomes are joined at the hip, what’s good for one can sometimes be good for the other. Josh โ Merck gapped up hard from the $137 area. This is a breakaway gap out of a year-long base, and the Moderna news Sean described above is exactly why. Buyers were not waiting for a better price. When a catalyst like that hits and the chart is already set up with a base in place, institutions move fast. The gap has held. The stock has continued higher from there to $152, with the 50-day rising at $128 and the 200-day at $115, both trending in the right direction and well below current price. The base did its job. This is what a stock looks like when it finally gets going. RSI is 77. Elevated, but breakaway gaps from long bases tend to stay overbought longer than you expect. The momentum reading is a reflection of the force behind the move. A reset toward 60 would be healthy and normal. It’s not a reason to step aside from what the chart is telling you. I’d be happy with consolidation and a cooling RSI but we don’t get to dictate that, whatever happens happens. Traders can use the top of the gap near $145 as their reference point. A close back below it means the gap is being filled and the urgency behind this move has reversed. In essence, you get to find out real fast if you’re wrong. Closing prices only, don’t get whipsawed intraday. Above $145 and you stay with the trade. Investors can give it more room, with the rising 50-day at $128 as the relevant floor. Below that and the post-breakout structure has broken down. Amgen, Inc. (AMGN): Sean โ We wrote about Amgen on March 9 alongside AbbVie, in the piece where we made the case that biotech belongs in the HALO conversation. It’s up about 17% since then and 35% YTD, and it’s been making new all-time highs this week along with the rest of the industry. Q2 revenue was $10.1 billion, up 10%, with product sales up 9% to $9.5 billion, net income of $2.4 billion and $3.5 billion of free cash flow in the quarter. We usually talk about breadth when talking about how many stocks are going up or down within an index, AMGN is seeing positive breadth across its businesses. Six growth drivers making up roughly 70% of product sales grew 26% as a group. Three of their main drugs Repatha, Evenity and Tezspire were up 37%, 38% and 42% respectively. In addition, rare disease was up 21%, oncology was up 18% and biosimilars were up 29%. Management raised full-year revenue guidance to $38.2โ$39.4 billion and non-GAAP EPS to $22.30โ$23.50, a $0.50 raise at the midpoint, with operating margin guided to 45%โ46%. Breadth is what separates a durable business from a one-drug pharma, and Amgen is getting contribution from every segment. When the growth is consistent and management is raising guidance on top of it, new highs tend to be a signal. Here’s Josh on what looks to be a great chart. Josh โ This thing is gone. Amgen has been one of the steadiest charts in the market all year and then, in the last couple of weeks, it just lifted off. The stock climbed methodically from the $280s last fall, with the 200-day acting as the reliable floor for that entire move. There was a real test in the spring when the stock fell into the major moving average. This was its first meaningful contact with that level in months but the buyers showed up exactly where they needed to and the level held. Since that retest, AMGN has rebuilt completely and is now making new all-time highs. The 50-day is at $379 and the 200-day at $353, both below current price and trending in the right direction. As Sean laid out above, the fundamentals are confirming what the chart has been saying all year. RSI is 73. That is an elevated reading, but it is the kind of elevated that comes from consistent, methodical accumulation rather than a sudden panic bid. Traders can use the $390 to $400 zone as their reference. That was the old resistance in February and March. The stock broke out above it on earnings earlier this month and that zone is now support. A weekly close back below $390 tells you the buyers who showed up on August 4th post-report have stepped away. Use the close to make that call, not intraday noise. Investors can anchor to the 200-day at $353, which is where buyers proved their conviction in the spring. Below that on a weekly close and the thesis has broken down. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
