Wall Street Sees Signs Battered Biotech Has Turned a Corner

(Bloomberg) — A four-day rebound in biotechnology stocks may be about to gain momentum after an industry ETF rose above a key resistance level, according to the chief strategist at Miller Tabak.

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The iShares Nasdaq Biotechnology ETF, or IBB, climbed over its 50-day moving average Friday after twice failing to clear the barrier in the last five months. With a gain of 7.8%, it was the sector benchmark’s best week in nearly two years.

“If (repeat, IF) it can rally further, it should help the group see the kind of advance that has not seen in over seven months,” Matt Maley said. He recommends investors watch the biotech sector into the second quarter even as he warns that a slew of clinical trial pauses could add to regulatory concerns weighing on the sector.

The breach of the 50 DMA comes as Raymond James analyst Dane Leone identifies three technical gauges that could fuel the rebound in biotech stocks. The extreme outperformance of large vs small biotech stocks, sector crowding and valuations that have dropped below the long-term median — despite the record surge in new public offerings last year — are all signals that the market may be ready to turn, he said.

The rebound follows “the most extreme period of stress in the modern history of biotech,” with only the global financial crisis even comparable, Leone said in a phone interview. “The risk reward for the sector is highly skewed to the upside.”

The comments follow advice on Thursday from JPMorgan Chase & Co.’s top strategist, Marko Kolanovic, to once again snap up risky assets in beaten down sectors — including biotech.

State Street’s equal-weighted SPDR S&P Biotech ETF, or XBI, has dropped 47% from its February 2021’s record high, while the IBB — which is more cushioned from volatility by its market cap weighting — is down 26% from its record.

Still, it may be too early to make the call and some analysts remain guarded. Piper Sandler analyst Christopher Raymond tracks the sector’s weekly fund flows. According to Raymond’s analysis the sell-off hits its nadir when the ratio of inflows to outflows dips below 0.3, the last time it reached that low the XBI rallied about 20% in the six months that followed.

For the week ending on March 16 that ratio was 0.58, a sign biotech may still be a ways off from capitulation, according to Raymond.

Some managers are looking much further ahead than this week’s rebound or the immediate technical indicators.

“Current share prices do not reflect the true value of many exceptional businesses that are driving a paradigm shift in the industry, said Julia Angeles, who co-manages $71 billion at Baillie Gifford. “We are moving to a world where drugs in the future will be more specific, biology becomes engineer-able and where personalized medicine becomes a reality.”

(Updates with closing prices.)

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