A few weeks ago, we closed a position in our American $33,000 Portfolio based in part on the money flow index:
The graph on the bottom is the money flow index, a measure of momentum that is sometimes a leading indicator of price movement in a stock. The MFI takes into account whether more shares are bought on the uptick or downtick. For example, a stock could open at $1, then 100 shares trade hands at $1.01, then 10 shares trade at $1 again. The price is flat but the MFI would show positive momentum because more shares were bought on the uptick suggesting motivated buyers.
With that in mind, let's have a look at five biotechnology and pharmaceuticals companies that have sold off recently and see if we can spot any indications of bottoms forming.
Veavis and Butt-Head
Let's starts with the obesity drug makers VIVUS (VVUS) and Arena (ARNA), or if you will: Veavis and Butt-Head. Both of these stocks have been selling off hard since they got their approvals on their respective weight loss drugs Qsymia and Belviq. Let me repeat that: both of these stocks have been selling off hard since they got their approvals.
The euphoria of selling weight loss drugs in the midst of an obesity epidemic sent both of these stocks parabolic right up until their drugs received approval, ARNA on June 27 and VVUS on July 17. Then, after a brief jump higher, shares started selling off and have not looked back:
Even insiders of VIVUS sold after approval. That is always a "hmmmmm" moment.
What may have happened here is that there was so much euphoria that these drugs would be approved that they soared. However, being allowed to bring those drugs to market is not the same thing as bringing those drugs to market in a lucrative manner. Approval does not mean that the drugs will be popular with doctors or free of lawsuits. So all the upside of approval was baked into the price, and as the market's eyes turned to the business of bringing the drugs to market (assisted by insider selling), reality stung hard. Here a commenter demonstrates his own concerns (this is the commenter's opinion):
Qsymia has serious safety issues and is a reformulation of existing drugs that don't work...In short Qsymia is a hedge fund scam soon exposed as fraud
So some folks have concerns. Is the pain over?
VIVUS had a bounce Tuesday, but the money flow index is a huge red flag here. Any number below 50 on the MFI indicates more shares trading on the downtick, any number above 50 indicates more shares traded on the uptick.
VVUS showed that while its price ran almost 10% Tuesday, more shares are trading hands on the downtick, suggesting there are motivated sellers in the market yet. So not only were there more motivated sellers than buyers, its gotten worse. That bounce looks like a huge gift for Veavis, and the MFI is flashing sell.
Arena is less clear. While there are more motivated sellers in the market according the the MFI, that appears to be abating.
VVUS: MFI screams "Sell Sell Sell!"
ARNA: MFI screams "The situation is unclear, and I'm not screaming."
I Love You, Mann
Not much to say about MannKind (MNKD), except: "Yuck! This is a sell-off with NO END IN SIGHT! Abandon Ship! Tell your mother you love her! This is the apocalypse!"
This company has terrific prospects with a winner like Alfred Mann and its Afrezza inhalable insulin coming up for approval. The problem is that this company burns cash and may have to dilute its shares again to raise money. That is keeping pressure on the name but remember Dr. Mann is a billionaire who not only has the money to loan to his namesake company, but (contrast this with VVUS) last month bought 31,250,000 more shares at $2.47.
Still, the sell off continues and a business catalyst - like Dr. Mann making a giant personal loan to the company or Afrezza gaining approval - could see this stock soar. But something like that needs to happen. Otherwise, like OJ said about when he finds the real killers: "look out!"
MNKD: MFI screams "Sell Sell Sell!"
Also a quick note here: some people will read the negative money flow and say that this stock has moved into "over-sold" territory. To me that is only as good as saying that something is going to turn around just because it has been battered for a while and is "due."
Only Mostly Dead
Both still show sellers in control, but the tide might be turning. These may be the beginnings of a bottom, or this could be short covering.
OMPI: MFI screams "Not Sure! Not Sure!"
SPPI: MFI screams "Wait and see!"
Keeping an eye on the money flow can help show the momentum of buying and selling even when the price does not, as in the example at the top, or even when the price is counter, as with VVUS.
Technical indicators alone are never enough reason to make decisions, underlying business catalysts can override the chart at a moment's notice. Witness the moves of Pluristem (PSTI) and Peregrine (PPHM) on positive cancer results on relatively lethargic charts...
...but the indicators can help tip the scales one way or the other.