Last year was a great year for the broad market. But for certain sectors, it's a good thing 2023 is in the rearview mirror...
Instead of soaring alongside the largest stocks, one corner of the market kept falling: biotech stocks.
This notoriously boom-and-bust sector fell for most of 2023. But it surged at the end of the year.
Biotech stocks hit a multiyear high in the process. That points to two possible outcomes. One could lead to potential double-digit upside this year... And if the trend continues, we might see even bigger gains in the months ahead.
Let me explain...
Biotech stocks are known for their volatility. And given what these companies do, the booms and busts in biotech stocks make sense.
These companies are at the cutting edge of medical research. They develop medications and therapies that can treat (or even eradicate) diseases. And their success hinges on whether an experimental product pans out. So investors tend to get overly excited – or overly pessimistic – about their prospects.
This sector can surge to incredible gains. We saw that in the first year of the pandemic. But those bull runs are often followed by a collapse... which is what we've seen since.
Recently, though, biotech stocks staged a breakout. They soared at the end of 2023. And they hit a multiyear high last month. Take a look...
The rally was a major reversal for a sector that had been taking it on the chin. But biotech stocks could move much higher in the months ahead – even after a big breakout like this.
To see it, I looked at every new 52-week high in biotech stocks. They've happened 19 other times since the data began in 1993. And they tend to lead to slight outperformance. Check it out...
Similar setups saw six-month returns improve from 5.9% to 7.7%. And over a year, the typical gain improved from 12.1% to 13.8%.
Now, this outperformance might not seem that impressive. That's because buying biotech stocks after new 52-week highs leads to more losing cases than you'd expect. Biotech stocks were higher a year after these breakouts just 58% of the time.
So biotech stocks don't always keep soaring after these setups. But when they do, the returns get much better... In the winning trades, biotech stocks were typically up 17.5% over six months and 35.4% over a year.
That means two scenarios are possible from here... Either biotech stocks will reverse back to the pain we saw for most of 2023, or they'll absolutely soar in the months ahead.
We'll be watching this sector closely. If it rallies further from here, major outperformance is likely... So if prices keep rising, consider adding biotech to your portfolio.
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