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.

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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.
    Brendan McDermid/Reuters/File
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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.

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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