You Can't Ignore the Biotech Breakout

The major averages couldn’t hold onto their morning gains yesterday.

Stocks spent the day slowly sinking into the red. But that didn’t stop a surprise FDA approval from shooting biotech stocks higher to begin the trading week.

Sarepta Therapeutics (NASDAQ:SRPT) earned approval from the Food and Drug Administration shortly after the market opened yesterday for a controversial muscular dystrophy drug called eteplirsen. Shares almost doubled instantly after the news hit the wire.

The eteplirsen approval sent shock waves across the entire biotech sector. Companies that have developed similar treatments—such as PTC Therapeutics (NASDAQ:PTCT)—posted double-digit moves.

A rising biotech tide is leading the market higher as traders continue to look for direction after the recent spike in volatility. If you’re looking for fast-moving trades, there’s no better sector than biotech right now.

Last week, we pondered whether speculative stocks like these red-hot biotechs could save the major averages from destruction as many investors prepared for a much bigger drawdown in stocks. The evidence was striking. Every single stock and sector hasn’t fallen off a cliff, we argued. Incredible snapback moves from market leaders including semiconductors, tech stocks, and biotechs hinted that a bigger move lower was probably off the table.

Sarepta’s new drug approval has helped trigger an important breakout in biotech stocks. The SPDR S&P Biotech Index (NYSE:XBI) is jumping above critical levels and approaching its January highs. Keep in mind the sector was down a mind-numbing 35% year-to-day back in February. As of this afternoon, it’s only about 5% away from breakeven on the year.

biotechs-break-out-dr

XBI is mopping the floor with the S&P 500 in September. While the S&P is down nearly 1.5% on the month, biotechs are up 10%.

More importantly, the big volatility drop we saw from the major averages earlier this month isn’t showing up on this biotech chart. As far as these speculative stocks are concerned, the early September selloff never even happened.

Remember, the biotech sector was ground zero for the speculative stock purge that occurred over the past year. But biotechs have been working on a new base for most of 2016. Now they could be shaping up for a big end-of-year rally. Heck, we’re smack in the middle of “Fed week” and biotechs continue to brush off the weakness displayed by the major averages.

With biotech stocks setting up once again for a strong move higher, you’d be crazy to avoid the sector. It’s a stellar trading opportunity in this volatile environment…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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