Biotech: How Sweet is Too Sweet?

A fierce rally in the biotechnology sector which began in early-October may very well seem ripe to finally crack.

However, it i worth remembering that momentum is a uniquely powerful aspect of markets, particularly when a flurry of mergers and acquisitions occurs at impressive premium. That is precisely what we have seen in many instances over the last few months for names housed in the IBB and XBI sector ETFs for biotechs. 

Thus, the rally and M&A may very well persist a bit longer in biotech than many might imagine, particularly when there are plenty of traders with (entirely reasonable) fears of trading the risky individual bios themselves. 

Allakos Inc. (ALLK) a developer of clinical-stage drugs, popped nearly 50% last week on news it was exploring strategic options including a potential sale. Since then, ALLK has settled into a tight bull flag and digested its massive rumor-related pop very well. To my eye, the subsequent reaction by ALLK to the rumor, rather than the rumor itself, may be the most bullish aspect about this type of action and, indeed, for the sector at-large. 

Put another way, in the midst of the holiday season there is little evidence to call a top to this rally in biotech. In fact, the more sound play may be stalking secondary entry points for stock flagging nicely, a few others we have noted for Members.