Biotech Stocks Are Not Tradable. Or Are They?

There is a sizable percentage of people in the stock market who would not touch a biotech stock with a ten-foot pole. Like all things in the market, there is an equally sizable population that swears by biotech stocks. One set thinks it is impossible to make gains in biotech stocks. The other set believes the rewards in biotech are well worth the risk.

The crowd that does not want anything to do with biotech stocks points to days like June 27, 2018. The previous day, June 26, 2018, Summit Therapeutics (SMMT), closed at a price of $12.65. It opened the following day at $2.52. Just like that, a trading account is wiped out. No wonder biotech stocks scare the pants off many people. See the charts below. Both the weekly chart and the daily bar chart show the same action.

The daily chart below clearly shows the big gap down. It could be because the FDA rejected an application. Or a competitor filed a lawsuit. Or a competing product got an FDA nod. Or its testing showed a lack of effectiveness of the products in its pipeline. Or it could be any number of reasons for the smackdown. You could check yourself using the google machine. The reasons do not matter. It only matters that the stock crashed. Clearly those holding the stock and looking at their account value could care less about the reason. They would be too much in a haze to care about anything except that their account just vanished into thin air.

Summit Therapeutics At New Highs

The other side of the equation are the folks who like to deal in biotech stocks and point to other days and weeks like those shown below on the same stock, Summit Therapeutics (SMMT) and its action over the past few months. After a period of invisible volume, Summit Therapeutics activity jumped from a weekly volume of 1.85 million shares to an incredible 374 million shares. In the same week, its price jumped from $0.78 a share to $3.92 a share. See the chart below.

The challenge of effectively trading biotech stocks hits the shorts and the longs the same way. Just as suddenly a gap down may occur, a gap up may occur just as suddenly. The whipsaw goes both ways. Unless one is extremely disciplined and throws out his line properly, the fish might jump out and eat him instead of getting caught on his line.

There is no denying that many biotech stocks are making new highs. Undoubtedly, many are just faking a move. But somewhere among them are the rare one or two of them that might actually make a run given the current market conditions.

But which ones might make a run? Which ones are fakes? The choices are numerous. The small ones might get bought out. The big ones also might get bought out. Or they may also get hit. The best way to deal with these sly creatures is to follow their price and volume action. The clues are there if one can decipher them correctly. And act correctly.

This is a chart for Eli Lilly. The biggest biotech stock on the market. The signal is so far clear. Until Eli Lilly (LLY) offers something to be concerned about, the outlook for biotech stocks seems to be smooth sailing. But the challenge of finding the right biotech stock is still insurmountable for many. A simple test also confirms the market is full of new products being introduced continuously.

Just pay attention to the commercials on your television. The number of new drugs being advertised is higher now than ever. When so many new products are hitting the market and being sold to the consumer, imagine the number of sales calls doctors are taking from biotech salespeople.

Is Summit Therapeutics (SMMT) A Good Stock?

There are no good stocks. Stocks are all bad. Unless they make you money. Then the bad stock has become less bad for a duration of time and for that duration of time it may even behave well, offering a false sense of a stock being good. Beware that a stock will go back to its bad old ways before you know it.

Suppose you had never heard of Summit Therapeutics. And one day while you were minding your own business and not paying attention, someone placed the following chart in front of you. What would you see? What is your observation?

It would seem like there was a prior uptrend. Followed by a base. And the stock breaks out to new highs. Suddenly, this stock, Summit Therapeutics seems interesting. Or is it really that interesting? Suppose a few days later you decided to check on how Summit Therapeutics was performing after what seemed like a breakout.

And you see this chart, just three or four weeks later.

Now you are thinking to yourself that stocks are indeed bad. Especially, when it is a biotech stock. All those people warning about staying away from biotech stocks were right. So, your mind works. You say to yourself, this stock is dead. Something happened that suddenly it got dumped.

Then that weekend, while you are having your favorite cup of coffee, you pick up a newspaper. Or check your phone. Or whatever you do when you are trying to keep your restless mind occupied, you by happenstance check on Summit Therapeutics (SMMT). And you see this chart below.

And you sit up suddenly, almost spilling your coffee. After having scared the pants off those holding the stock and driving most of them away at the $2.39 sudden dump of the stock, within days Summit Therapeutics had tripled in price. What do you think those with deep pockets and the knowledge of what is to come have to do with these price moves? Nothing at all, correct? Oh, to be so naïve when it comes to stocks. It is all about the right perspective.