Each week the Stock Exchange highlights the results from different technical trading methods. We also provide contrast, and often dissent, from a fundamental analyst. It is always interesting when we find a pick where multiple methods agree. This week the entire group gives the nod to health care stocks, and there is even some fundamental support.

Review

Our last Stock Exchange suggested that it might be time to buy the dip in IBM. The unusual agreement came because differing methods reached a similar conclusion. We see the same thing this week on health care, although the specific stock choices vary. Combined with the group endorsement of NVDA three weeks ago, we have an unusual streak. Maybe the Stock Exchange discussion should be held around a campfire instead of before the poker game!

Let’s turn to this week’s ideas.

This Week – A Fresh Look at Health Care?

Health care stocks started a decline when drug prices became a campaign issue. The weakness continued after the election. Uncertainty reigned. Would ObamaCare be repealed? Which health care stocks would survive the policy change? Recent political developments have not clarified the uncertainty, but some candidates are showing strength.

Let’s start with RoadRunner, who has an interesting, non-biotech pick.

Road Runner: I have discovered my favorite chart pattern in Align Technology (ALGN). Here is the rising channel and the current position at the bottom.

Health Care ,Biotech

J: I keep asking you to earn your lizards by drawing the channel.

RR: Even though I cannot draw, I pecked out this chart:

J: Isn’t that a huge break of the channel in April? Shouldn’t we draw the channel to include that break? And this is another of your Wile E. Coyote stocks.

RR: I suppose you will once again invoke Chuck Carnevale and F.A.S.T. graphs.

J: How did you know? The fundamentals might catch up with your purchase in a few years. And here is a nice summary (Timothy Gornall at Seeking Alpha) of what the company does – bringing orthodontics to regular dentists.

RR: Have you made a profit from my channels?

J: Yes.

RR: Then do not complain. I am only holding this for a month. And get someone else to do the drawing! Beep Beep!

Oscar: I have a new sector favorite: Biotech. It’s not uncommon for me to buy the Biotech sector and hold it for a few weeks. This week looks like an especially good time to be in Biotech. The IBB chart has a few tantalizing details:

The first thing that strikes me here is how the 50 and 200 day moving averages are starting to wilt. We’ve been off recent highs for just about two months, but not so far off that the stock price has tanked. Rather, it’s hovering around the $290 mark. Would it be unreasonable to expect another increase up near $305?

J: You do not trade the biotech ETF, right?

O: Right. Ever since you started complaining about intra-day pricing of these sector ETFs, I have traded my own basket of stocks.

J: They are highly correlated with each other, and all very liquid. None of the members are “dragged along” in an ETF trade. Each of the members is equally weighted.

O: Just like the Cubs batting order. Every member counts.

J: Not the analogy that would occur to me. Any specific ideas?

O: Ian Happ is one I am watching, even though he is a rookie.

J: Actually, I was hoping that you would discuss a stock.

O: Oh. I can discuss one of my specific holdings, Incyte (INCY).

O: Here we see some of the dips that have been common in the sector, although it looks like the drops in this stock have been a bit exaggerated. That’s why I felt comfortable picking some positions on the upswing in this past week.

J: Biotech expert John McCamant declared Incyte to be the “King of ASCO.” This is the meeting of the American Society of Clinical Oncologists. The reports showed “compelling evidence of efficacy across multiple tumor types including, lung, bladder, kidney and head & neck cancers, with impressive safety that is leading

to long duration of responses (DoRs)”. The market had been nervous about these findings, but John has been steadfast on the fundamentals. I took his advice, buying the dip for our “aggressive” program. This is a typical example of a stock making the transition from a “story” to actual earnings. I have found this to be an attractive entry point for biotechs. The stock has lost some loyalists, while the sharp-pencil, accounting-style crowd is skeptical.

O: Right. I see that in sports all of the time. Just look at the NBA.

J: Instead, how about your updates on reader requests?

O: OK. Here is the current list.

Holmes: I always like a bargain, and Biogen (BIIB) is no exception. The month of May has been a rough one here, although there’s been a slight pop up from below $250 just this week. Let’s review:

Previous price declines to the $250 range have happened twice over the past 12 months, and each were followed by a significant spike up above the $290 range. That doesn’t suggest to me that a sharp spike is imminent – only that the market tends to value this stock well beyond the $250 range. I could see myself holding this position for a couple months.

J: Have you been following the news about drug pricing and the health care changes?

H: No. What news? As you know, I study price, volume and trends. We have a nice dip here, and it is worth buying.

J: For once, the fundamental analysis agrees with you.

Felix: I have nothing new this week.

J: I am not surprised. When we have a sideways market, you have few chances to spot momentum.

F: That is exactly right. You and Vince always tell us not to reach. We are just following orders.

J: We? I suppose you mean that Athena has nothing fresh either?

F: Right. She said to tell you that you will see her again when something is happening.

J: How about your weekly stock rankings? Still buy, hold, or sell, depending on the color?

F: Yes, and I welcome new questions. That is how the list is built.

Conclusion

We can always learn from the model ideas. It is a great reminder that different approaches – each all profitable – see the same situation in very different ways. It also is a reminder that there is nothing wrong with waiting for the right moment. That said, when widely disparate methods highlight a sector or stock, it is probably worth a look!

Here is a summary of the cast of characters. Find your own favorite!

Stock Exchange Character Guide

Character Universe Style Average Holding Period Exit Method Risk Control
Felix NewArc Stocks Momentum 66 weeks Price target Macro and stops
Oscar “Empirical” Sectors Momentum Six weeks Rotation Stops
Athena NewArc Stocks Momentum One month Price target Stops
Holmes NewArc Stocks Dip-buying Mean reversion Six weeks Price target Macro and stops
RoadRunner NewArc Stocks Stocks at bottom of rising range Four weeks Time Time
Jeff Everything Value One month or long term Risk signals Recession risk, financial stress, Macro

 

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they

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