Trader’s Narrative

Once again swine flu is causing headlines and the mobilization of health professionals and the government in combating it. Again? In 1976 President Gerald Ford put into motion a massive vaccination effort to halt the spread of swine flu on the advice of medical experts. About 40 million Americans were inoculated before the program was stopped.

While death is tragic, it isn’t helpful to sensationalize what is happening. For example:

…CDC scientists estimate that an average of 36,000 people (up from 20,000 in previous estimates) die from influenza-related complications each year in the United States

That was in 2003, and refers to regular flu. So far, counting all deaths around the world, we aren’t even close to 10% of that figure. While I’m not prescribing that we not take any measures, I hope that this puts into perspective what is happening so that we don’t panic.

Although it might seem callous, as traders, the proper reaction should be, where’s the opportunity? I’ve created a watchlist (see below) for stocks that are in play.

There are also many general stocks like FEMSA (FMX) and Grupo Televisa (TV), being hit just because they are Mexican and not because they are in any direct way related to the swine flu pandemonium. Of course, this makes no sense but since when was the stock market supposed to make sense? When this blows over, they will be the first to recover and the biotech related stocks in turn, will rediscover gravity.

Food Industry:

• Smithfield (SFD) - unconfirmed reports a farm owned by SFD was ground zero
• Tyson Foods (TSN)
• Hormel Foods (HRL)
• Industrias Bachoco (IBA) - producers of poultry and pork products

Biotech & Health:

• Novavax (NVAX)
• Quidel (QDEL) - makers of a flu test
• Luminex (LMNX)
• Qiagen (QGEN)
• BioCryst Pharmaceuticals (BCRX) - products still in clinical trials
• Baxter (BAX)
• Crucell (CRXL)
• Generex Biotechnology (GNBT) - drugs in pipeline for general influenza
• GlaxoSmith Kline (GSK) - makers of Relenza an antiviral for swine flu
• Gilead Sciences (GILD) - receive 20% royalty for Tamiflu
• Roche Holding (RHHBY) - original makers of Tamiflu
• Sinovac Biotech (SVA) - Chinese drug maker working on a vaccine
• Johnson & Johnson (JNJ) - Purell hand sanitizer & surgical masks
• Noveko (EKO) - makers of surgical masks (traded on Canadian exchange)

Travel:

• Grupo Aeroportuario del Sureste (ASR)
• Grupo Aeroportuario del Pacifico (PAC)
• Grupo Aeroportuario del Centro Norte (OMAB)
• Grupo TMM (TMM)

Have I missed any? Let me know of any stocks that should be up there by leaving a comment below.

Based on the internal technicals that I watch, the healthcare sector is starting to look really interesting here for a long.

I’m referring to the healthcare sector as defined by the S&P Healthcare Index by the way (the exchange traded fund for the sector is XLV) This index has been in an intermediate downtrend since the middle of March 2006 but there are a number of signs that there is a reprieve around the corner.

For one, the number of 52-week lows in the sector now outnumber the number of 52-week highs - a sign in the past that things are really oversold. As well, the percentage of stocks above their moving averages within the sector is quite low. And finally, the Rydex mutual fund assets for this sector are showing that it is being shunned (to a similar degree that it was in October 2005) by the often wrong but never in doubt, mutual fund trading crowd.

Finally, the bullish percent index of the sector is near levels which have presaged a reversal in the past:

Of course, that doesn’t mean that one jumps in and buys here willy nilly. I’d look for the strongest stocks within the sector and wait for an appropriate entry. One tell, for example, would be when the bullish percent turns up.

You already know that I’m partial to Merck. I still like it because it has one of the better technical pictures from among the big pharma companies.

I would also keep an eye out on biotech because it has similar underlying technical behaviour: