As Goes Biotechs, So Goes the Market

A legendary trader once remarked, “Speculation is to bull markets what air is to fire.”

In any bull market, you have to look at speculation to measure the robustness of the move.

A couple of weeks ago, I told you that biotechnology stocks as an equity class typically embody the most speculative sector in the market.

That’s because it takes years — if not decades — for a promising drug in the clinic to be developed by a biotech to get FDA approval (assuming it ever gets approval).

And the typical biotech drug being developed will cost anywhere from $500 million to $1.5 billion to develop.

Biotech companies are capital intensive with high burn rates. They are flat-out risky business.

But as I said in my article two weeks ago, the gains can be breathtaking and life-altering.

Just as in gambling, like poker… if you can calculate the odds and stack the deck in your favor, you can minimize risk and come out a winner.

And right now is probably the best time in human history to be invested in biotechnology stocks.

Because simply put, the demographics promise biotech stocks as a group will remain in an uptrend for decades…

As I’ve enumerated in these pages before, the No. 1 reason biotechs will remain bullish for years to come is the aging of the American population. It has to do with the conga line of baby boomers heading off into retirement.

Starting in 2008, the first baby boomer applied to receive Social Security retirement benefits… and ever since, an army of baby boomers has been heading off into retirement — to the tune of 10,000 per day.  

This will continue for the next 17 years.

This past Friday, the iShares NASDAQ Biotechnology Index Fund (IBB) made an all-time record high. Take a look:

Now, we’ve recently experienced a massive sell-off in gold and silver. And many market pundits were quick to jump on the bear bandwagon, declaring the bull market over. More fuel was added to this argument as the Dow declined nearly 3% in a week.

But let me state in unequivocal terms: There’s no way biotechnology stocks are making record highs if the broader market is entering a bear market.

And we have some good company on our side…

Last week The Daily Ticker interviewed Barry Ritholtz, who writes the investment blog The Big Picture.

He told TDT the bull market isn’t over. Here’s what Ritholtz said:

“When you take a look at all the surveys, we’re somewhere in the middle. We’re not excessively bullish; we’re not excessively bearish.”

Among the mixed signals, he sees “cash balances in individual investment accounts at 18-month highs,” suggesting investors have lots of money to pour into stocks when the time is right — a bullish signal.

But he also sees “high bull/bear ratios,” suggesting the buyers will take a backseat to sellers or simply sit out the market for a time — a neutral or bearish sign.

In the meantime, there are stocks and sectors that Ritholtz favors: dividend payers, value stocks over growth, and health care and consumer staples stocks.

“Seventy thousand baby boomers retire every day,” says Ritholtz. “They’re huge consumers of biotech, pharmaceuticals, health care and hospital services.”

He suggests investors buy shares of a health care or biotech ETF. Among individual stocks he favor Johnson & Johnson (JNJ), a health care and consumer staple play, and Pfizer (PFE), a pharmaceutical company that Ritzholtz says could lead the sector.

“There are opportunities but make sure you’re not overpaying,” he advises.

Dividend payers and health care stocks! That’s music to my ears…

In my Wealth Advisory investment newsletter, we recommended readers buy shares of IBB and Pfizer in November 2011 and again in July of last year.

Both are up 33% and 34% since.

It’s still early days in this bull market.

Forever wealth,

Brian Hicks

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Brian is a founding member and President of Angel Publishing. He writes about general investment strategies for Wealth Daily and Energy & Capital. For more on Brian, take a look at his editor’s page.