After a fitful two weeks, biotech stocks appear to have found a bottom and appear to be spiking as a result. Monday’s big gains appear to be small potatoes in retrospect as biotech stocks soared on Tuesday, climbing sharply along with the Nasdaq Composite Index. On the whole, it appears as though the initial sell-off of growth stocks that hit biotech so hard has climaxed and investors are pouring back into an industry that may look like a much better deal than it did while it was peaking in late February.
Tuesday saw a gain of 3.25 percent for the iShares NASDAQ Biotechnology Index ETF (IBB) and 4.37 percent for the SPDR S&P Biotech ETF (XBI) , particularly big moves for ETFs that contain so many stocks.
This means that, since bottoming out mid-day on April 15, IBB has climbed over 13 percent and XBI over 16 percent. This coming after these two ETFs hit their 52-week high at the end of February. IBB plunged 24.6 percent from that point to its bottom on April 15, and XBI 33.1 percent over that same period.
Coming off of a massive 2013 when IBB and XBI gained 67.43 percent and 50.73 percent respectively, many market watchers have been anticipating a major correction for the industry, possibly even a bursting bubble that would result in a major shift in value. Certainly, the sort of losses incurred by the industry in the six weeks from the end of February to the middle of April could appear to be just the sort of correction to fit that bill.
However, the difference between a correction and a bursting bubble could be key in the coming weeks, and today’s big gain could indicate that the former is what we’re seeing here. If the performance of these two key ETFs, and the indices they’re tracking, is any indication, investors may have seen the correction they need to regain confidence in biotech stocks as a whole.
During the rocky trading action in the first half of April, it appeared as though investors were fleeing growth stocks of all varieties in favor of safer plays as technology and biotech plunged while the rate on 10 year T-bills also decreased, a sign that money was shifting into the safety of the bond market from the riskiest stock plays.
However, since the start of trading on April 14, things have been distinctly positive. Since that point, the Dow Jones Industrial Average (DJIA) is up 3 percent, the S&P 500 is up 3.5 percent, and the volatile Nasdaq Composite is up 4 percent. What’s more, the VIX, a volatility index traditionally considered to correspond with pending disaster (whether that’s at all a rational interpretation of this index or not), is down nearly 25 percent since peaking at the market bottom on the 15th.
So, it appears as though the concerns that drove the big biotech declines so far this year have been dissuaded. At least on Tuesday, investors appeared convinced that the market had adequately corrected itself and the time was right to get back into biotechs. However, with May 1 marking the beginning of the “worst six months,” the question of bubble vs. correction may not be completely settled for at least another couple of weeks.
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