These pharma stocks could give your portfolio the flu

January 24, 2017 02:36 PM

We spend a lot of time highlighting sectors and industries that are outperforming the broader market and garnering plenty of bullish headlines, but it's just as important to identify lagging market niches for long-only investors to avoid and short-oriented traders to target.

Banking stocks (both regional and general) are essentially unchanged on the year as the yield curve is roughly flat since Jan. 1. That leaves retail, food and beverage and pharmaceutical stocks as the only industries that are trading down by more than 1% so far this year. The first two are tied to the consumer, and based on the recent improvements in consumer confidence figures, these stocks will likely need a run of persistently below-expectation economic data to fall too much further relative to the overall market.

After today's rally, there are only have a couple of industry groups that are actually falling so far in 2017, as the below table shows.

Source: Faraday Research
 

The underperformance in Pharmaceutical stocks has an obvious culprit: a few weeks ago, then-president-elect Donald Trump noted in his first news conference that the pharmaceutical industry was "getting away with murder" and that “Pharma has a lot of lobbies, a lot of lobbyists and a lot of power. And there’s very little bidding on drugs.” Based on this rhetoric and the potential for new regulations on the industry (one of the few that may actually face increasing regulation under the Trump administration), we believe that pharmaceuticals will continue to face major headwinds in the coming months. As a possible counterpoint, It's worth noting that Trump's Health Czar nominee, Tom Price, has previous connections to the "Big Pharma" and may be more lenient then some bears fear.

Among the large-cap pharmaceutical names we track, Allergan (AGN), Gilead Sciences (GILD), Eli Lilly (LLY), Bristol Myers Squibb (BMY), and Amgen (AMGN) are showing the worst long-term momentum according to our proprietary measures. These are some names that long-only investors may want to avoid and short-biased traders may want to focus on, at least until the sector shows signs of bottoming out!

About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.