The thing about asset bubbles is you never know what will cause them to pop or when they will pop. Valuations can tell you there is a bubble, but as a timing signal, valuations are not at all useful.
The Biotech bubble has been one of the biggest in the market. So big in fact, that even Fed Chair Janet Yellen identified Biotech stocks as an area of concern over a year ago. The bubble only got bigger following her comments. Along with the fab five (Facebook, Google, Amazon, Netflix, and Apple) biotech stocks had been some of the best performers in the market.
That was, until July. Biotechs started to roll-over at the end of July and then took a hard tumble last month. What was the catalyst for the recent leg down in Bio-techs? Candidate Clinton spoke ill of the pricing practices in the industry. She pledged to take on the “outrageous” price-gouging in the specialty drug market.
The NASDAQ Biotech index lost almost a third of its value from the July high to its recent low. Who knew campaign promises were such a vital factor in biotech stock investing?
I can’t tell you if biotech shares have further to fall or if this is just a big correction in an ongoing bull market. I would advise you to view the recent performance of biotechs as a warning shot if you are pushing your luck in any other bubble stocks (yes Facebook, Netflix, Amazon, et al. qualify). Who knows when you’ll lose your opportunity to sell to a greater fool?
Jeremy Jones, CFA
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