3rd Quarter Stock Preview: Searching for an Even Keel

Rotation out of defensive sectors and the anticipation of U.S. healthcare reform are taking the wind out of the sails of big cap biotech, a trend that's expected to continue through the third quarter. But heavily beaten-down small caps are picking up steam as retail investors wade in and small cap, healthcare and biotech specialists feel pressure to increase the beta in their portfolios to atone for poor performance last year.

While cautious investors may be sticking to mid-caps or occasionally big cap bargains, the small cap momentum is likely to continue as long as the broader markets at least stay on an even keel. This is translating into a better financing environment for small cap biotechs, many of which have successfully managed their operating expenses. If this continues, the carnage may not be as bad as was feared...