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Biotech investors: be sure to circle February 24 on your calendar

Saturday, 7-February-2015

If you invest in biotech stocks, be sure to circle February 24th on your calendar.  According to WSJ, this is the day Federal Reserve Chairwoman Janet Yellen is scheduled to give her next semiannual monetary policy report to Congress.  The way it works is that along with her verbal testimony, which takes place over two days in front of the Senate Banking Committee and House Financial Services Committee, the Federal Reserve staff files a full written report to Congress about the state of the economy.

You probably remember the last time Ms. Yellen gave this testimony back in July, because that was when in the written report she called out smaller biotech and social media stocks as being "substantially stretched."  That comment sent the SPDR S&P Biotech ETF (NYSE: XBI), an index that tracks smaller biotech stocks, down 8.7% during the next few days.  Those smaller stocks didn't take off again until mid-October.


The February report is going to be interesting for two reasons:  


First, most Federal Reserve watchers agree that it was a mistake for the Fed to call out individual sectors of the economy like that.  Critics argue that it is not the Fed's job to choose winners and losers, and they also question how the Fed has the expertise to know if a sector is technically overvalued.  After all, the market seems to have proven the analysis wrong given how biotech eventually returned to being a hot sector.

In fact, to this day we do not know if Ms. Yellen personally feels strongly about the "substantially stretched" comment, or if it was simply a factor of her staff including something in the written report without putting much thought into it.  Given how all of those questions and concerns have been batted around publicly ever since, it is possible that the Fed might have second thoughts about saying something this time around.  Maybe they will just ignore it?


Second, and on the other side of the argument, keep in mind that the Fed might actually feel obliged to once again include something similar in the report for purposes of consistency.  Think about it, if the Fed said biotech stocks were "substantially stretched" back in July, how can they not say the same thing this time around when the sector is now 32% higher seven months later??  If anything, they might be thinking that biotech stocks have gone from being stretched to having reached a point of outright insanity.


Biotech investors should definitely be thinking about this second scenario because it could be a real risk to stocks over the short term.  As the last time proved, Ms. Yellen saying biotech stocks are stretched does not necessarily make it true, but the weight of who she is will take the sector down for at least a little time regardless.  Whether you agree with her or not, she is the most important person in finance and so stocks will follow.  That is why you should be aware that this date is coming up and to watch it closely.  


What to do on February 24 if you are a trader/investor?


As is always the case when Ms. Yellen is scheduled to speak, the media is going to be all over this testimony so don't worry about missing the coverage.  However, more important than what she says will be the written report because that is where the biotech issue was raised last time.  You can find a copy of the report on the morning of the 24th at the Federal Reserve's website here.  Just click on a link to the February 2015 report, do a search for the word "biotech", and hope you don't see anything! 


We will surely be in for a few bad months in the event that something about biotech is mentioned in there, but don't necessarily let that get you down.  The sector bounced back once, and can do it again.  Regardless of what the Fed says, biotech has a lot of fundamental things in its favor right now like great science and a substantial tailwind from demographics.  That being said, it would be nice if Ms. Yellen takes it easy on us and doesn't put investors through the volatility again.

Who Am I?
Brad Loncar

I'm an individual investor from Kansas City.  My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>

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