Why Biotech Stocks Are Down This Week

Investors are again worried about a biotech bubble as biotech stocks take another big hit this week.

Since April 23, the Nasdaq Biotechnology Index has dropped 6.8%. During the same time, the S&P Biotechnology Industry Index is down 8.5%.

Some of the most popular biotech stocks are feeling the brunt of it.

Gilead Sciences Inc.  (Nasdaq: GILD) has dipped 2.2% this week. Amgen Inc. (Nasdaq: AMGN) is down 6%. Biogen Inc. (Nasdaq: BIIB) has fallen more than 10%.

But here's what is most important to understand: What's going on right now is not a biotech stocks bubble bursting...

Biotech Stocks Are Not a Deflating Bubble

Money Morning's Biotech Investing Specialist Ernie Tremblay said on March 27 that this is normal behavior for biotech stocks.

"The sell-off we're seeing now seems to happen every year at about this time, like clockwork," Tremblay said. "There are always things going on in the news that seem to explain the drop, but the meta-picture is simply this: the market breathes in, and the market breathes out."

biotech stocksIn fact, we haven't even reached correction territory yet. A stock market correction is defined as a 10% dip in the market. So we still have some room to go down before we even reach a correction.

And a correction should not be mistaken for a bubble. A bubble is a cataclysmic crash in the market.

Tremblay says the market is just stabilizing after an impressive run. From Jan. 1 through April 23, the Nasdaq Biotechnology Index climbed more than 21%. That far outpaced the Dow Jones, which gained just 1.3%.

"Investors, even institutional investors, are aware of this market movement," Tremblay said. "So as the biotech sector races upward, everyone begins to wonder how long the momentum can last. After a while, they get queasy from the altitude, and their risk tolerance erodes. Time to take profits. So share prices begin to tumble."

We saw a very similar situation in 2014.

Between February and April, the biotech market dipped roughly 20%. Of course, that was much worse than what we've seen now.

At the time, nervous investors panicked and fled the market. But between April and December, the market rebounded and gained 37%. Investors who left in a panic missed the lion's share of those gains.

Wedbush Securities' Head of Equities Trading Ian Winer reiterated Tremblay's point to The Wall Street Journal this week saying this was "a normal drawdown" for biotech stocks.

"(Biotech) has been trading on an incredible multiple and everybody owns it," Winer told The Journal.

While there isn't a big biotech stocks crash to worry about, there is volatility in the market right now. Here's how Tremblay recommends investors play biotech stocks today...

How to Invest in Biotech Stocks Now

With the recent pullback, investors have a great opportunity to add to their position in strong biotech stocks.

"My investment strategy is always the same in this situation: follow the Bollinger bands," Tremblay said.

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Bollinger bands are a volatility indicator that can graphically show you a stock's standard deviations from a simple moving average over time. Touching the upper line repeatedly indicates the stock is probably overbought and may be headed downward soon - time to sell. Touching the lower line repeatedly tells you the stock is oversold and should head upward - time to buy.

"When a company you own looks oversold - when its moving average touches the bottom band twice in a short period of time - buy more shares."

If you're looking to add new positions to your portfolio, Tremblay urges investors to follow upcoming regulatory catalysts. These can be clinical trial data releases or FDA milestones.

"These catalysts can, and often do, send a stock soaring even in the face of a more general market correction," Tremblay said. "Do due diligence, try to determine whether the upcoming catalyst will give a stock or up or down push, and invest accordingly."

The Bottom Line: This is not a biotech bubble we are seeing. The markets have dipped in the last week, but there is no sign of a cataclysmic crash. This is just the natural flow of the biotech market. Instead of panicking and fleeing biotech, take this opportunity to add to your positions in strong biotech stocks.

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