Biotech Stocks: Time to Worry

Remember when the biotech world was falling apart? Neither do we.

I mean, just look at these returns: Gilead Sciences (GILD) has gained 41% so far this year as investors appear to have put their Sovaldi worries behind them; InterMune (ITMN) has quintupled in 2014 after Roche agreed to purchase it for $8.3 billion; and Intercept Pharmaceuticals (ICPT) has surged 350% as drug trials have been surprisingly good. All told, the iShares Nasdaq Biotechnology ETF (IBB) has risen 21%, more than double the S&P 500′s 8.3% rise.

Steve Remich

It’s time to start remembering, says Weeden’s Michael Purves, who provides four reasons why it the point might be coming to worry about biotech stocks:

1. We are once again entering overbought territory…the daily RSI's are entering levels which typically coincide with a sell off.

2. The current price level of the iShares Nasdaq Biotechnology ETF is right at the March peak, a significant resistance point.

3. I continue to be concerned that the flows continue to come out of the sector – iShares Nasdaq Biotechnology ETF shares outstanding have been trending down since the March price peak.

4. I also wonder how much of the most recent rally is short covering related…the amount of short interest relative to iShares Nasdaq Biotechnology ETF shares outstanding (essentially a more accurate short interest ratio) is at record highs. There is a lag here on the data…so this could be sign of a final squeeze.

Net net, the warning signs are flashing yellow, not red, but I think the hedging discussion with high  prices and lower volatility levels is a relevant discussion.

Shares of Gilead Sciences have dropped 1.3% to $106.11 at 2:23 p.m. today, while InterMune has gained 0.2% to $72.99 and Intercept Pharmaceuticals has jumped 2.3% to $301.18. The iShares Nasdaq Biotechnology ETF has advanced 1.2% to $275.96 today.