tuck,
I think the first six months of this year can best be explained by an "old economy" (pharmas) vs. "new economy" (biotechs) dichotomy. Until early March, people dumped the old economy stocks and bought the new, this philosophy then reversed sharply in the mid-March through June period. Over this period, pharmas and biotechs were generally inversely correlated. (Logically of course biotechs and pharmas should be fairly closely positively correlated.)
Pharmas are traditionally viewed as defensive plays, good in a recession. However, there is clearly a long-term problem with pharmas because of their patent expiration problems and the political climate (the latter effects the biotechs too, of course). In the past, the pharmas have also been buoyed by the sweet deals they could cut with starving biotechs.
The pharmas used to be so much bigger than the biotechs that even a small redeployment from them into biotechs caused a big biotech surge. But note that the redeployment went first into the first tier biotechs - this is what was happening in '97-'98. Going forward, I have to believe that the biotechs are going to beat the pharmas - mid-tier biotechs like SEPR and VRTX have pipelines that look like pharmas in size and quality.
Looking back, one other sign of a top was that very low quality issues were popping sharply. Unfortunately this sign doesn't mark the top - you would have missed quite a ride in some of them if you had exited as soon as they joined the party. Rather it marked the beginning of the top. Right now, we're not seeing much action in the lowest tiers, and this argues for us not being at a top here.
Peter |
