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|Includes: Intuitive Surgical, Inc. (ISRG)

Technicals Matter in a MO Market

Some important trends are developing in momentum stocks some of which are on in our Life Science Portfolio. As we have written previously many momentum stocks are being driven by media buzz, novel business models and sponsorship from hedge funds and growth mutual funds. If you are a momentum trader or investor you know that momentum begets momentum like a law of physics (p=mv) that lies outside of the financial analytics universe. With enough fuel from the FED, a hedge fund can borrow at 2-3% and launch their favs to momentum cult status. In this bull market sentiment rules.

Within our life science universe we have maintained a bullish stance since 2009 and several of our picks landed up in the MO camp:

Alexion (ALXN $91.72), Regeneron (REGN $172) and Pharmacyclics (PCYC $91.6) are all up huge since initiation. These are larger cap stocks with deep product portfolios and innovative technologies. These stocks have only been "discovered" over the past 3 years coincident with this round of the biotech bull market. Whereas ALXN and REGN have corrected and stabilized PCYC is still near a top, up more than 100% since we picked it as a paired trade long, with Medivation (MDVN $46.65) short. MDVN is a broken MO stock (double top at $58) down 9% YTD but still up 25% over 12 months.

Traders looking for a correction in a "bubblicious" biotech market might explore a paired trade with long veteran biotechs, short MO stocks. Infinity Pharmaceuticals (INFI $48.66) is a classic MO stock up 453% over one year and 39% YTD! There is no compelling news to account for such a move in INFI except accumulation by major hedge funds such as Fidelity and Orbimed Advisors which now own 10M shares as well as upgrades by analysts with price targets near $50. Despite a lack of Phase 2 data, Infinity is perceived to be a leader in treatment of hematologic malignancies with IPI-145 an oral inhibitor of P13K delta and gamma and a Phase 2 clinical compound for NSCLC, a docetaxel combo agent. INFI has a hefty market cap of $2.3B which we know may not be a reliable measure of value in biotechnology investing. INFI has ample cash of $325M and a book value of $310M. So the stock could be a good hedge short in a downturn or as paired long trade with a veteran biotech that has revenue growth but lost the MO, such as Alkermes (ALKS $23.17), a CNS player with a market cap of $3B , book value of $919 and revenues forecasted of $540M.

Outside of biotech other headline MO stocks were down on news and downgrades:

Amazon (AMZN $265) down 3.4% (short only 1.9% of float) on decent volume and Netflix (NFLX $188.37) down 2% (short 14.76% of float). Intuitive Surgical (ISRG $490) has been in a 2013 downtrend flat YTD of a Feb 1 high of $584. The stock broke today at 14:40 p off 3.8% for the day, as robotic hysterectomy surgery for use by OB/GYNs is being questioned.

Many experienced traders have been burned shorting "overvalued" stocks so the strategy is highly speculative. Nonetheless charting can be valuable to determine a break in momentum or a market correction and MDVN as well as ISRG are good cases. Netflix is a good example of a "counterparty trade "where competing investors battle each other for dominance. When a correction in the marker finally hits, it is likely MO stocks will go down more than the S&P.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Short momentum stocks only as a hedge.