On the surface, stocks appear strong. With the bounce on Thursday, the major averages have moved into positive territory for 2015 year-to-date. Yet a deeper analysis suggests not is all well.
For instance, breadth, or the percentage of stocks participating to the upside, peaked in December and has been rolling over ever since. That’s a sign that the bulls have been relying on a narrowing base of support with which to hold the overall market higher.
And for contrarians like me, that means these areas — vulnerable as they are to joining the rest of the market to the downside — make for ripe pickings for short-side candidates.
One area in particular has been severely overbought: Biotech. In fact, the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) hasn’t suffered a significant correction below its 50-week moving average since 2011. But now, one by one, individual stocks in the sector are starting to roll over.
Here’s a list of five such biotech stocks to short.
5 Biotech Stocks to Short: Isis Pharmaceuticals, Inc. (NASDAQ:ISIS)
Click to Enlarge Last week, Isis Pharmaceuticals, Inc. (NASDAQ:ISIS) stock dropped below its 50-day moving average for the first time since October and dropped below its lower Bollinger Band in a significant way for the first time since July.
The company is not profitable and is expected to see its cash burn rate increase in the next fiscal year from 61 cents to $1.06 as its development schedule grinds on.
After seeing a 77% increase over the last six months, ISIS stock is down 3% so far this year.
5 Biotech Stocks to Short: Amgen, Inc. (NASDAQ:AMGN)
Click to Enlarge Shares of Amgen, Inc. (NASDAQ:AMGN) have been drifting lower since the middle of December and has now filled its October gap.
Investors are losing patience with the development pipeline, which is expected to offset weaker sales of older products.
The company recently issued in-line guidance that didn’t help generate any buying interest at these levels.
AMGN stock rode up 18% in the last six months, but has fallen more than 5% so far this year.
5 Biotech Stocks to Short: Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN)
Click to Enlarge Achillion Pharmaceuticals, Inc. (NASDAQ: ACHN) stock is dropping out of a strong uptrend going back to June on heavy volume as investors take profits following a massive 450% rise.
The stock had been the focus of takeover chatter that now looks less likely on disappointing clinical data for the hepatitis C drugmaker.
ACHN stock is still up 4% this year, but has collapsed 12% since last week.
5 Biotech Stocks to Short: Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX)
Click to Enlarge Stock for Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), like ACHN, is dropping out of an uptrend pattern going back to the summer as profit taking sets in after an impressive rise.
The stock suffered a spate of analyst downgrades in late January on issues including valuation and market potential for an upcoming drug release.
VRTX stock has fallen nearly 9% so far this year.
5 Biotech Stocks to Short: Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY)
Click to Enlarge Stock for Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY) has been pushed lower after forming a double top pattern in December and January as investors balk at the pricing of a secondary offering of shares — diluting their stake in a company that continues to burn through cash reserves as it pursues its development schedule.
Shares of ALNY stock have been up 56% in the last six months, but are down more than 13% in the last three weeks.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
