We had another mixed day on Wall Street on Wednesday, suggesting a lack of commitment. The Nasdaq rose 0.4%, while the small caps fell twice as much. Meanwhile, the CBOE Volatility index (VIX) fell 4%, which suggests that sentiment is normalizing. Meanwhile, investors are flip-flopping with the slightest of headlines. Therefore, finding stocks to buy at these levels has become trickier than normal.
Because they don’t trade in a vacuum, and investors must account for the possibility of surprise corrections. If the indices fall, they will drag all stocks down with them.
This wishy-washy commitment is the byproduct of having all-time high levels going into a Federal Reserve tightening cycle. In reality, the macroeconomic conditions are still solid. The Fed must unwind the QE because the economic reports are so strong. It is hardly a burden having too strong of an economy in the United States.
Nevertheless, for now, the thought of rate hikes has spooked investors. This is an understandable reaction since inflation is hitting long term record levels. My guess is that this is a short-term phenomenon, and this too shall pass. Raising the overnight rates a few ticks is not likely to hamper the earnings potential of stocks.
To be on the safe side, we focus our efforts on only finding stocks to buy with solid foundations. In fact, this is the thesis that all three stocks share today. They have fallen hard into very pivotal support levels. This is key because it would be the opposite of chasing runaway rallies.
When investors are emotional, they tend to make rookie mistakes. Some chase too late on the way up, and others exit too late on the way down. Today’s thesis is for us to scoop up what they are panicking out of after a long fall.
I focused my list of stocks to buy today on the biotech sector. I wouldn’t suggest taking all three at the same time because they tend to trade in unison to a degree. They are:
- SPDR S&P Biotech ETF (NYSEARCA:XBI)
- Direxion Daily S&P Biotech Bull 3X Shares (NYSEARCA:LABU)
- Biogen (NASDAQ:BIIB)
Stocks to Buy: SPDR S&P Biotech ETF (XBI)
The biotech sector is as tricky to trade as they get. They are prone to headlines, which makes it like a surprise earnings report any day. Therefore, investors need to take great care eliminating as many questions as possible when investing in them. First and foremost they require a ton of homework on their fundamentals. Not everyone has that kind of time or knowledge to check into each company.
XBI is an easy solution for that, because it casts a wide net on the whole lot. Each of its components has a small sliver share of it, so none can bully it around. This is important because it spreads the headline risk broadly so to avoid blowout trades.
The fundamental assumptions in this sector involves a lot of faith in the teams. They are usually striving to make human lives better. They have ups and downs and I never short XBI because it would just be bad juju. Today it made my list of stocks to buy because of the support zone it may have hit.
XBI stock has been through some tough trading weeks. Since its top last February, it has lost 40% of its value. What makes the timing now important is that it has hit a big pivotal level. The area around $100 per share was where they broke out after the pandemic. Moreover, it was from where they failed before it, even going back to 2018. Clearly, investors think it is a line worth fighting for. I anticipate that this time will be the same, so there should be support coming.
Direxion Daily S&P Biotech Bull 3X Shares (LABU)
Everything that I said about XBI applies directly to LABU stock, only three times as much. This ETF tracks the XBI but with three times the leverage. So if the XBI moves 1%, the LABU stock goes 3%. This makes them popular among investors, but they can be dangerous.
Technically, LABU is nearly identical to XBI at this stage but not entirely. LABU started trading in summer of 2015 when the biotech sector was crashing. It fell 85% straight down before it bottomed in February of 2016. That $20 level has held as the bottom since then.
This week LABU is back at it, so for all intents it is at all-time lows. The only time it fell below $20 per share was during the pandemic. Clearly those were exigent circumstances that don’t repeat often. Therefore, the bulls can have confidence knowing that “the bottom” is near.
Other than the 2020 lows, LABU held weekly closes just below $25 per share. Clearly, going long it now is not an obvious mistake. It either falls a bit more, or swings into a nice rally. Investors would do well to stop out if it loses footing into new lows. Then it would be trading literally off the charts.
Stocks to Buy: Biogen (BIIB)
The third of our three stocks to buy is Biogen. You may have already read the headlines about an unfavorable Medicare ruling. It caused the stock to plunge in a giant gap from $25. It recovered some, but BIIB stock still closed down 7%. At its worst, the dip Wednesday constituted a full correction by Wall Street standards.
While the news is bad, it doesn’t completely kill the bullish thesis for the stock. The company still generates billions in revenues, so they can still recover from it. As we mentioned earlier, today’s thesis for Biogen stock is technical. Going forward I bet that there are enough buyers lurking to provide support.
A sell off this big may have lingering days of red follow through. I am happy that the bulls managed to close $5 above the Dec. 6 bottom. Therefore, technically the bears did not get a confirmation trigger yet. This can still happen today or Friday, but for now the bulls live to trade another day.
The conviction in catching this falling knife really stems from the age of this level. Biogen stock has bounced from these levels since 2013. This includes the pandemic and two massive crashes in 2019 and 2016. Clearly, the bottom below current levels has earned the benefit of the doubt.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.