The S&P is 181% above its March 2009 low, which sounds impressive -- but compared to biotech, that's nothing!
Over the same time period, the Nasdaq Biotechnology Index (INDEXNASDAQ:NBI) has risen an incredible 316%.
However, a certain question is on everyone's mind, and we can illustrate it with a simple Google (NASDAQ:GOOG) News search:
Everyone wants to know -- is biotech in a bubble?
The sector rose 98% from the start of 2013 to the top on February 25, 2015, at which point the index dropped a quick 12%.
Of course, it didn't help that biotech giant Gilead (NASDAQ:GILD) recently received a letter from Congress inquiring about the price of the company's Sovaldi hepatitis C drug, spurring concerns about price controls.
So is this the beginning of the end for biotech?
Or a mere bump in the road?
Drug price controls are unlikely in the near future.
Biotech has had a great run over the past few years. After a 300%+ move in five years, we're in all likelihood way closer to a top than a bottom.
Even with a 12% decline off the top, the sector's still overheated, with stratospheric valuations amid a streak of outperformance that can't last forever.
Additionally, even if Congress really has no power to institute price controls, the risk isn't off the table longer term, and there's no telling how badly that could impact sentiment toward the sector. That means lower valuations and a disruption in the red-hot IPO market.
A high-risk way to profit from an extended biotech slump is to short the SPDR S&P Biotech ETF (NYSEARCA:XBI). Relative to IBB, XBI has greater leverage to smaller, more volatile names. In a broad sector downtrend, that could mean more downside potential.
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