Are These 2 Biotech Stocks Set For a Letdown?

It hasn't been the best of times for biotech investors. According to data compiled weekly by Schaeffer's Senior Quantitative Analyst Rocky White, the biotech sector's Expectational Analysis® set-up is the worst of all the sectors we cover. In other words, there's still a strong bullish bias surrounding biotech stocks despite their dreadful technical performance. 

Looking at the numbers, the average 12-month return of stocks that fall under our biotech umbrella is negative 38.6%, while the iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB) has dropped roughly one-fourth of its value in 2016 alone. What's more, not a single biotech stock is trading above its 80-day moving average, a trendline that seems to be a "buy" signal for one broad-market benchmark.

Despite these technical struggles, short interest has remained largely unchanged over the past year, and the number of "buy" ratings from the analyst community has slipped just 2 percentage points to a still-high 68%. In summary, it would appear the biotech sector as a whole could be in jeopardy of headwinds if some of this optimism fades. 

That doesn't mean a few individual stocks haven't enjoyed a few bouts of positive price action. In today's trading, ZIOPHARM Oncology Inc. (NASDAQ:ZIOP) and Valeant Pharmaceuticals Intl Inc (NYSE:VRX) are both enjoying relatively rare upside moves. 

For ZIOP, which has gained 7.3% at $7.80, the price action stems from news that the first patient has received a dose of the drugmaker's treatment for malignant glioma in a Phase I study. Drug trial news sent shares of the company shooting higher earlier in the month, as well. 

However, on a longer time frame, ZIOP has struggled mightily on the charts. In fact, ZIOP has lost almost half its value since its all-time high of $14.93 from November, and the stock is certainly vulnerable to a potential capitulation among bulls.

For instance, over 13 ZIOPHARM Oncology Inc. (NASDAQ:ZIOP) calls have been bought to open for every put during the past 10 weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), while the stock's Schaeffer's put/call open interest ratio (SOIR) sits at 0.12 -- just 3 percentage points from an annual low. While some of these calls may have been initiated by short sellers seeking a hedge, an unwinding among "vanilla" bulls could further jeopardize the stock. 

As for VRX, it was last seen 4.6% higher at $82.92, even after Moody's Investment Services last night lowered its debt rating outlook on the company to "negative" from "stable." It's certainly not the first time an outside entity has scrutinized the firm, however, and such negativity has led to a nearly 69% tumble since the shares hit a record high of $263.81 in August. 

And like ZIOP, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) could be in major trouble if option bulls throw in the towel. Adding to this risk is the optimism seen from analysts. Nine of the 15 brokerage firms covering VRX say it's a "strong buy." As such, additional bearish brokerage notes could weigh on the shares going forward.