By: Costas Bocelli — October 13, 2016
Is This Sector Defying the Odds?
A little more than 16 years ago, Buster Douglas shocked the world by knocking out “Iron” Mike Tyson, the undefeated, undisputed heavyweight champion of the world.
Flash forward to today…
Less than four weeks from now, the United States presidential election will be decided, and the betting markets are now predicting Hillary Clinton will win by a landslide.
So if Donald Trump were to pull off the victory, it would be a “Buster Douglas” moment all over again.
If you recall the article I published just after the first debate, I sized up the two candidates by applying relative strength analysis based on the price data from the Iowa Electronics Market (IEM), a real-money futures exchange where people can wager on the outcome of the presidential election.
And after the first debate, we found that Mrs. Clinton quickly seized back the momentum with the most recent column in the relative strength chart flipping back to a column of X’s. That development signified positive relative strength for Mrs. Clinton.
Now the momentum seems to be snowballing, because when we look at the relative strength chart as of yesterday, Mrs. Clinton is demonstrating very positive relative strength when compared to Mr. Trump.
Below is the most recent relative strength chart for your review.
The chart compares Mrs. Clinton to Mr. Trump, so columns of X’s represent positive relative strength for Mrs. Clinton and columns of O’s represent positive relative strength for Mr. Trump.
As you can see, the current column of X’s has filled in a lot of boxes since the last time we looked at the chart.
In fact, after news broke that several prominent GOP leaders were abandoning support for Mr. Trump, she gained the highest readings of relative strength in more than a year.
So with less than four weeks to go and one final televised presidential debate scheduled for October 19th, it’s shaping up that Mr. Trump is going to need a Buster Douglas like upset to defy the odds and win the race for the White House.
Looking at the financial markets, there’s one sector that is, in a sense, actually defying the odds.
You see, we apply relative strength analysis to identify which sectors are the strongest and which ones are the weakest.
We can quantify the analysis and use the data to rank more than 40 narrow sectors that comprise the stock market universe.
And here’s what’s compelling…
This one particular sector has been quietly rising the ranks and now stands in the top five in our relative strength rankings list, despite all the negative publicity it has been receiving.
It’s the Biotech sector!
Yes, the same sector that Mrs. Clinton has been bashing every chance she gets on the campaign trail. She has been a boisterous demagogue against the sector for its pricing practices on life saving drugs and medications that millions of Americans depend on every day.
And in some instances, her comments directed to the sector have had adverse impacts on the price movements in many of the stocks and ETF’s in the space.
But here’s the thing…
Despite all the negative rhetoric, the reality is that the biotech sector remains one of the strongest sectors with respect to relative strength, not only against the other remaining sectors but also compared to the broad market.
In essence, many of the stocks that compromise the Biotech sector are outperforming, a very important development individual investors should be informed about.
Why is the Biotech sector so strong with the likelihood of a Clinton presidency?
Here are three possible explanations:
1. If Clinton wins, she’ll not be as tough on the sector as her rhetoric suggests. A leaked report suggests that she has a public policy stance and a private policy stance. And because she’s backed by many powerful special interests, including the drug lobby, pricing reform and regulation will not be a policy priority.
2. Political gridlock. Even if Clinton follows through (assuming she wins) and takes on the drug pricing issue head on, there’s a good chance that Congress could impede drug policy reform. You see, there is also a good chance that the GOP will retain control of at least one House of Congress and could stand as a road block to any significant legislation to reform drug pricing.
3. The fundamentals are overtaking the pricing reform headline risk. As we enter third-quarter earnings season, one of the most profitable sectors in the market is Healthcare, of which biotech is a subsector. Healthcare as a group is expected to grow earnings by 4% as compared to the same quarter a year ago. Money tends to flow to the sectors that are demonstrating earnings and revenue growth, especially looking forward.
If you’re inclined to fade the headline risk and are looking for investment ideas in the biotech sector, it’s best to target the ones that are demonstrating positive relative strength versus the broad market and as compared to its sector peers.
Here are three biotech companies that rank highly on our list that you can consider: bluebird bio (Symbol: BLUE), Kite Pharma (Symbol: KITE) and Blueprint Medicines (Symbol: BPMC).
Until next week!
Contributor, True Market Insider