Biotech stocks are the market's breakout stars

The action in the biotech sector of the stock market is huge, but risk-averse investors should proceed with caution.

By , Guest blogger

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    Traders gather on the floor of the New York Stock Exchange, January 18, 2012. According to Brown, biotech stocks are enjoying a multi-year breakout, but the market sector is risky.
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It's not a corner of the market that I follow very closely but I am blown away by the action in the biotech sector.  I want to show you the $IBB ETF, an index fund that owns 119 biotech stocks, on a monthly chart to get the scope of we're talking about here (click to embiggen):

No need to draw any special lines - this one is as clear as a bell.

I did a little bit of buying this morning and I intend to add on pullbacks so long as she holds above the breakout.

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The upside here is that large pharmas will continue to acquire these companies so long as their own R&D departments are starving.  They have tons of cash and a burning desire to add pipeline - which makes almost every publicly-traded biotech a target for someone.

The risk here is that IBB has a very concentrated portfolio, the top ten holdings (AMGN, ALXN, CELG, GILD etc) make up 55% of the fund.   There is also the risk that these companies merge with one another which would add to the concentration - as an example, Pharmasset (VRUS) was bought by Gilead (GILD) - and both are top ten holdings.

This is all very bullish action but investors with a weak risk tolerance need to be careful of course - this ain't your daddy's healthcare index fund.

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