Strength amid turmoil
07/06/18

With tariffs and trade wars (again) taking over financial headlines (see “Trade war gets real,” below), some traders will likely seek bullish opportunities in small-cap stocks, which have already been enjoying a strong 2018.

Although a prolonged, no-holds-barred trade war has the potential to scorch all corners of the market, many analysts and traders have cited the potential relative advantage held by domestic small-cap stocks: their lower exposure to foreign tariffs.

Biopharmaceutical stock Loxo Oncology (LOXO) has the benefit of being a small-cap stock, as well as being in a recently hot sector, health care, which has outperformed the S&P 500 (SPX) by a more than 2:1 margin over the past five days. It’s also had a good run on the charts lately, and apparent successes in the labs: One of LOXO’s innovations is developing “personalized” cancer treatments tailored to the specific genetic profiles of individual tumors.1

Loxo Oncology (LOXO), 1/3/18 – 7/5/18. Near range high

Source: OptionsHouse

The daily chart above shows that after breaking out to new highs in mid-May, LOXO has been in a trading range between roughly $163.50–$188.50, with the exception of the one-day jump to $208.95 on June 4. Although the retreat from the high may look “toppy” to some traders, yesterday shares rallied back to the high of the range after reaffirming its lower boundary just four days earlier.

A push above the upper boundary (the stock closed at $188.20 yesterday) leaves leaves open the possibility for the stock to challenge the June 4 high, come what may afterward. In its most recent quarterly report, by the way, LOXO notched an 80% earnings surprise and reported revenues of more than double the consensus estimate.2

In the meantime (the company’s next earnings release is slated for mid-August), bullish traders will be looking to see whether the stock makes a quick retreat to the bottom of the range, or continues to exhibit relative strength in a tariff-turvy market.

Trade war gets real: President Trump followed through on his Chinese tariff threat, slapping 25% duties on $34 billion worth of goods imported from China as of 12:01 a.m. ET today ($16 billion more could follow in two weeks; the president suggested the total could eventually reach $550 billion).1 China, which accused the US of starting “the biggest trade war in economic history,”2 has vowed to respond with equivalent measures, including tariffs on soybeans, which have continued to spiral to multi-year lows amid the evolving trade war.

Market Movers Update: Since dropping almost 11% on June 28 when Amazon.com (AMZN) announced it was getting into the prescription delivery game (see “Amazon gives drugs stocks a headache”), Walgreens Boots Alliance (WBA) had rallied more than 5% as of yesterday’s close:

Walgreens Boots Alliance (WBA), 4/11/18 – 7/5/18. Initial rebound

Source: OptionsHouse

 

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1 Motley Fool. 3 Cancer Stocks That Could Soar in the Second Half of 2018. 6/8/18.

2 StreetInsider.com. Loxo Oncology (LOXO) Earnings. 7/6/18.

3 Bloomberg.com. China’s Tariff Response Takes Effect After Trump Ignites Trade War. 7/5/18.

4 CNN.com. China: The US has started 'the biggest trade war' in history. 7/6/18.