Is Amgen (AMGN) a Good Choice for Dow Membership?

Amgen Inc. (AMGN) replaced Pfizer Inc. (PFE) in the Dow Jones Industrial Average on Monday, ending the pharmaceutical rival's 16-year membership. The timing has many market watchers shaking their heads because the departing company is currently engaged in trials for BNT162b2, one of the most promising COVID-19 vaccine candidates, and a home run could translate into much higher stock prices. (See: Pfizer (PFE) Could Enter New Uptrend.)

Key Takeaways

  • Amgen has posted much stronger returns than Pfizer in the past five years.
  • Amgen stock reached and reversed at six-year resistance ahead of the Dow news.
  • Amgen buying interest has been usually weak so far in 2020.
  • Speculators may depart the biotech sector as the potency of COVID-19 vaccine candidates becomes clearer.

So, is Amgen a good choice for the Dow, right here and right now? The reasoning for the change makes sense because Pfizer's performance has been sub-par for years, posting a 0% cumulative return between 2015 and 2020, before dividends. Amgen returns have been subdued but rock-solid over the same period, gaining 42%. This divergence is somewhat less extreme when including dividends but still enough to make a difference to most investors.

The membership makes less sense when looking at long-term price action. Amgen has been trading in a channel since 2014, reaching resistance in February 2020 and again in July. It reversed at that barrier twice and is now oscillating in a sideways pattern that is close to setting off a sell signal. More importantly, accumulation has failed to match bullish price action, while the iShares Nasdaq Biotechnology Index Fund ETF (IBB) has reached 2015 resistance and reversed.

COVID-19 vaccine candidates have underpinned the biotech sector since March, with a heavy flow of speculative capital lifting many marginal players. That arena is now moving from a speculative into a "show-me" phase that will eliminate many candidates as "ineffective" or not as effective as alternatives. A ton of capital is likely to exit positions during this period while a few winners emerge. That doesn't bode well for higher biotech prices into 2021.

Divergence is when the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator, or is moving contrary to other data. Divergence warns that the current price trend may be weakening and in some cases may lead to the price changing direction.

Amgen Long-Term Chart (2012 – 2020)

Amgen stock cleared 12-year resistance in the $80s in 2013 and entered a powerful trend advance that topped out at $182 in July 2015, at the same time that pricing scandals hit the biotech and pharmaceutical industries. A selloff into the 2016 presidential election carved the outline of a rising channel that has contained price action in the past four years. May 2019 and March 2020 declines failed to break channel support, while December 2019 and July 2020 rallies have failed to mount channel resistance.

Amgen Short-Term Chart (2019 – 2020)

The stock pulled back from an all-time high at $265 in July, finding support near $235 in August. The Dow news triggered a quick uptick that, so far at least, has failed to reach the prior high. Recent price action is also testing a breakout above the December 2019 high, with two violations of new support in the past seven weeks. It has also cut through channel support four times during this period, with both tests reflecting growing shareholder anxiety.

Meanwhile, the on-balance volume (OBV) accumulation-distribution indicator is telling a bearish tale, topping out with price in December 2019. OBV barely budged during a nearly 70-point ramp into May and tested March's seven-month low less than two weeks ago. Buying power has improved in reaction to the Dow news, but the indicator is still flashing an extremely bearish divergence, predicting lower stock prices in coming months.

On-balance volume (OBV) is a technical trading momentum indicator that uses volume flow to predict changes in stock price. Joseph Granville first developed the OBV metric in the 1963 book Granville's New Key to Stock Market Profits.

The Bottom Line

Amgen stock could underperform in coming months, despite its brand-new membership in the Dow Jones Industrial Average.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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