Biotechnology stocks have important news for investors. They are on the verge of a breakdown. In simple terms: if the biotechnology stock index goes slightly lower from today’s levels, the sector will be in deep trouble as it will enter a tactical bear market.
Our viewpoint is based on simple chart analysis. The biotech sector, represented by ETFs IBB or BTK, are trading right at their long term uptrend. Stock bulls do not want to see lower prices, as that would imply a breach out the long term uptrend, also known as a breakdown. A bear market is likely to follow.
What the biotechnology stocks do is not only important for biotech investors, but also for all stock markets. Biotech, as part of the health sector, has been a leader in recent years. Markets typically rotate their leaders and laggards. But still health and biotech are risk sensitive so stock bulls do not want this sector to break down.
What to do if this sector breaks down? Stock investors should watch what other technology sectors do, for instance by following the growth index ETF (IVW). In case most other sectors are not breaking down, there would not be too much risk of ‘contagion’. Specifically to biotech investors we can only say to over their biotech stocks in their portfolio, and ensure their biotech positions only cover sector leaders.