An old Wall Street maxim states the most bullish thing a stock can do is get overbought and stay in that position. The iShares Nasdaq Biotechnology Index exchange-trade fund (IBB), which counts Biogen Idec (BIIB), Celgene (CELG) and Gilead Sciences (GILD) as its three top holdings fits that bill.
How much Higher Can It Go Before the Inevitable Correction?
When a rising trend continually moves as it has done in biotech, chartists you can call it “going parabolic,” in correlation to the shape that forms on the chart. The slope of the trend becomes more at an ever-faster rate and talk of bubbles is will be common. Understandably, it is also a hazardous condition for bulls and bears alike as timing must be precise. Even a day early or late can end up in multiple percentage point losses.
With that in understood, biotech is now walking the path between an overbought but firm sector and an overbought but exhausted sector. However the ETF gives details that this behavior over the past few years, there are various stocks within that show it over just the past year. BioMarin Pharmaceutical (BMRN) for Example, shows rising slopes since it broke out last July.
But again, even the staunchest opponents cannot look at biotech and feel comfortable selling it short right now. There is no instant technical reason to state that the top is in or even that a pullback is about to happen. New highs alone are not bearish.
Vertex Pharmaceuticals (VRTX) can be placed into this category. While this maker of small-molecule drugs for patients with serious illnesses such as cystic fibrosis is trading at all-time highs, it had been trailing behind the biotech sector for a few months. But this week, it finally broke through resistance level put in place by its January and early March highs.
This also means that it fully dusted off the sharp loss that it suffered in late January after missing Q4 earnings estimates. The stock does not appear to be overbought as are some of its peers. However, it is not far above its large moving averages, which is more times than not a red flag for stocks that have moved too far from a “reasonable” trend. BioMarin, for instance, is trading 50% above its 200-day average.
While the biggest names in biotech come from the smaller end of the capitalization scale, giant Amgen (AMGN) is also breaking out, specifically from a long corrective downward spiral. Since peaking in December, the stock took a hit for more than 14% into its early February low before bouncing.
After the New England Journal of Medicine released a new class of cholesterol drugs, along with one developed by Amgen, showed potential to fight a number of diseases, and the stock shot higher. It was not only a fundamental event, but it was also a technical breakout from the multi month decline.
Riding trends is one of the ways investors choose to make cash in the stock market, but when those trends are too steep concerns start to rise. Searching for stocks in solid groups that are just starting to benefit from the group’s strength is a smaller risk to participate without having to run after stocks that have already enjoyed a long play.