sell on fact or a re-rate on news? , page-26

This stock sector is still offering great risk/reward set ups
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Thursday, April 14, 2011
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From the S&A Grail Trader:

Right now, all three of our long-side stock trades are in the biotech sector. As we noted last week, most stocks and commodities are moving in lockstep... in a sloppy, choppy sideways pattern. Right now, there are few clear trends setting up, and few excellent risk/reward trades setting up, either.

This "everything moving together" phenomenon makes the biotech sector an attractive space to find trades. Individual biotech stocks tend to trade on their own merits and stories, rather than along with the broad market, so we can find much better risk/reward setups here. We're finding many companies that have sold off hard, formed bottoms, and are "in compression"... ready to shoot higher.

Also worth keeping in mind is that there is a big "buyout boom" taking place in the biotech sector right now. Big drug companies have plenty of cash and few new blockbuster drug prospects... so they are deploying cash into small acquisitions. In the past few weeks, we've seen takeovers of small biotechs including Celera, bid for by Quest Diagnostics at a 32% premium... Cephalon, bid for by Valeant Pharmaceuticals for a 26% premium... and Inspire Pharmaceuticals, bid for by Merck for a 25% premium.

We expect this trend to continue, so this gives us the opportunity to be in stocks that are relatively disconnected from the market as a whole. Eventually, we'll do more trading in traditional stock and commodity sectors. But with the market in a trendless, highly correlated pattern, we have to move into unconventional areas to find excellent risk/reward setups right now.