Last November, in the column "Biotechnology Is Ripe for a Correction," I wrote about my concerns for the stocks in the sector becoming overpriced.
Over the four months that followed those observations, the upward trajectory accelerated into a classic log-periodic bubble or blowoff, which I wrote about in February in the column "Biotech Juggernaut Keeps Rolling."
Over the past six weeks, this sector has begun a consolidation that has resulted, so far, in a peak to current value decline for iShares Nasdaq Biotechnology ETF (IBB) and SPDR S&P Biotech ETF (XBI) of 15% and 19%, respectively, with both now having negative returns for the past six months.
Although I believe these pullbacks are indicative of a cyclical bear market in this sector that is occurring within a secular bull market, the declines most probably have much further to go.
The downside part of this correction is very similar to what I observed was probable for gold following its peak and the beginning of its decline, which I wrote about in 2012 after gold had already declined by about $200 from its 2011 peak.
As I discussed was probable in that column, the hot money that was responsible for the price being run up beyond fundamentals began exiting, and as the price fell, a vicious cycle of unwinding took over, which ultimately brought the price back in line with the long-term fundamentals, which I wrote about last May in the column "Gold, Mining Stocks, ETFs a 'Store of Value' at Current Prices."
For gold, the peak to most recent low, set on July 24 of about $1,080 per ounce, was a decline of about 43%.
Although I still think it is probable that gold will decline further from here and break the $1,000 level before reversing and returning to much greater highs over the next five to 10 years, the majority of that cyclical retrenchment is over.
I believe the biotechnology sector will deliver a similar kind of performance, but the correction there is just beginning.
As the hot money exits, a similar self-validating process will ensue and bring the biotechnology sector in line with at least the valuation of the technology sector overall.
One of the best anecdotal pieces of evidence to suggest this has begun, beyond the decline in prices for stocks in the sector broadly, is the decline in the price of Juno Therapeutics (JUNO) over the past two months or so.
On June 18, MIT Technology Review wrote about Juno's attempts at curing cancer.
The stock was trading at about $52 when the story was published, but received no pop by speculators afterward, and has traded steadily lower since, now at about $34.50, a loss of 33%.
I don't think this is a reflection of speculators' assessment of Juno's treatment potential. It's a symptom of fatigue by speculators in a sector that's simply become overpriced in the near term.
As I wrote about with respect to gold a few years ago, biotechnology is in the nascent stages of a similar cyclical bear market within a secular bull market and will follow a similar path to that of gold over the past few years, although I think the correction in the biotechs will be of a much shorter duration, meaning a faster decline.
This is also a similar process to what I discussed was probable for the Chinese markets earlier this year, in the column "One More Time: Avoid China," which had also entered a classic log-periodic blow off trajectory.
These three sectors -- gold, Chinese stocks and biotechnology -- all have radically different market dynamics with the sole commonality being that they all not only became priced beyond fundamentals but entered an upward blowoff trajectory following it that mandated a correction.
The correction in gold is about over now but has taken four years. The correction in Chinese stocks is a bit over half done but has occurred violently over the past three months.
The correction in biotechnology is just beginning and will probably be much closer to the experience of Chinese stocks than that of gold.
One of the other principal differences among the three groups is that although gold and biotechnology stocks are most probably experiencing a cyclical bear within a secular bull market, Chinese stocks are likely in for a much longer period of no or slow growth, which has been their character since the 2008 financial crisis, interrupted briefly by a bubble.
The quandary for long-term speculators in the biotechnology space is whether to attempt to time the correction I think is in its early stages.
If you've held through the run-up, have no less than a five- year horizon, and can psychologically handle a cyclical 50% drawdown while waiting for the secular bull market to reassert itself, then I would advise holding through.