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Cerulean Pharma Inc. (Nasdaq: CERU) stock has shifted gears over the past two trading sessions, posting a 46.5% gain, after falling gradually since mid-June. This should be a wake-up call for biotech's naysayers.
The two-day ascent comes at a time when short sellers betting on biotech's downfall are adding to their positions, and when even the country's head central banker has little faith in the sector. Biotech has been on a rally over the last year, a rally that a lot of traders feel has run its course.
And it's true biotech was on a remarkable, if not overly optimistic, tear over the last two years – the iShares Nasdaq Biotechnology Index (Nasdaq: IBB) gained 32.1% in 2012 and 65.5% in 2013. It has notched another 10.6% so far this year.
But the sector has already corrected itself from its overstated gains and shook out the bad money.
"I think everybody this year kind of expects an adjustment to take place, which did take place," Money Morning's BioScience Investment Specialist Ernie Tremblay said. The correction was most evident when the IBB closed at its yearly high of 272.81 on Feb. 25, and then dove 21.2% to 215.04 in April.
Even after this downdraft, U.S. Federal Reserve Chairwoman Janet Yellen offered her take on the sector, writing in a July report that "valuation metrics in some sectors do appear substantially stretched – particularly those for smaller firms in the social media and biotechnology industries…"
What Yellen's comments did, far short of offering substantial market analysis, was add an unneeded voice to a chorus of biotech doubters that are not looking at the actual strength of the industry, but are crying "bubble" in hopes of making money off short trading.
That could explain why biotech is so heavily shorted and those shorts only continue to grow. Short selling data is reported every few weeks, and at the time of Yellen's remarks short float on the flagship biotech exchange-traded fund, IBB, was already at a heavy 44.7%. Since then, it has reached 49.4%. Short sellers see these dramatic increases in biotech company shares and are waiting for some kind of correction to pocket gains on the downside.
But investors who listen to Yellen and the short-selling doubters are missing out on huge profit opportunities…