Wednesday, February 19, 2014
Biotechnology stocks have gone wild...
In just the past 12 months, the Nasdaq Biotechnology Index is up 84%. It's up 253% since mid-2010. That's just the broad index. Blue-chip biotechnology names like Biogen and Gilead are up more than 300% in the past three years.
After such a huge run, it's only natural people are starting to say biotechnology stocks "are in a bubble."
We've been urging readers to own biotech for years now... so we have insight on this sector that many people don't. And although many have made a fortune from our advice, this essay contains the most valuable idea yet...
This essay answers the question, "What should I do if something I own is in a bubble?"
First of all, let me say that I don't think biotech stocks are in a "bubble." Not yet. They are not on the cover of mainstream magazines. The financial networks are not running hour-long specials on how to invest in biotechnology. Those are the sorts of things you see during a bubble.
But that has nothing to do with the core idea I want to pass along today. I'm using the current biotech bull market to show you an important idea on taking profits...
Many S&A readers are familiar with using 25% trailing stop losses. The basic idea here is that if you buy a stock at $10 per share, and it rises to $20, you'd sell the stock for a profit if it falls 25% below the $20 level. In this case, it would be $15.
But if you have made big profits from a giant bull market (like the one biotech has enjoyed), and you're concerned the bull market is about to end, there's a unique way to handle it...
First, don't try to "time" the market top. It's impossible. Even professional traders can't perfectly time tops. If you try to time the top, you'll almost always sell your position too early. A runaway bull market – or a bubble – can produce HUGE gains at the end... so you want to try to be around for them.
Second, if you've been riding the bull market with a 25% stop loss and you're worried about giving up profits when the rally ends, consider "tightening" your stop to 10% or 15%. This will help lock in a significant profit... and still give you some "wiggle room" to hold the position in case the market works higher.
Years ago, my colleague Steve Sjuggerud came up with a brilliant, common-sense way to explain this idea. He compared it to seeing a movie. When you get to a movie early, you can get an excellent seat near the middle of the theater.
But let's say you're confident the movie is about to end. If this is the case, you can leave your seat and grab one near the exit. When the movie is over, you're one of the first ones out. You won't get held up or trampled by the crowd... like the one that is starting to pile into the biotech sector:
Is biotech in a bubble? Again, my stance is "not yet." But it could get into that territory sometime this year. If you took our advice and went long, don't worry if it does. Don't get scared out of your position by people calling it a bubble (people who probably missed the whole thing). But consider this classic adjustment of your exit strategy. Enjoy the rest of the movie... just get a little closer to the exit.
If you're like most people, you have trouble deciding when to take some money off the table. Dr. David Eifrig says "the strategy for selling is determined by why you bought in the first place." Learn how "Doc" plans his trades here: Before You Sell a Single Share of Stock, Read This.