Biotech is in the midst of major breakout, but one technician says buyer beware

Biotech's looking like a healthy bet these days.

Since hitting its lows on Dec. 26, the group had soared more than 20 percent as of Friday, and was posting its best start to a year since 2012. And according to Washington Crossing Advisors portfolio manager Chad Morganlander, the good times are set to roll on.

"You could see a bit of an underperformance in the short run, but when you look six to 12 months, we would be buyers of the biotech index," Morganlander said Friday on CNBC's "Trading Nation." "We believe they're going to continue to grow on the top line well above the S&P 500 for revenues as well as for earnings. We think the consolidation of the industry has just begun and will continue."

Morganlander also believes biotech will serve as a "safe haven" trade if global growth starts to decelerate, especially given its strong fundamentals.

The group of stocks has been bolstered by a flurry of unexpected mega-deals in the space as of late, including Bristol-Myers scooping up Celgene for a whopping $74 billion and Eli Lilly's $8 billion deal for cancer gene therapy company Loxo Oncology.

But Newton Advisors technician Mark Newton says investors might want to wait a bit before getting into biotech, saying the sector's rapid run may be a little too extreme. He points out that since August, the once-battered sector has actually regained about half of its losses, which is "good on an intermediate basis." However, he encourages investors to wait for a dip before buying.

"I look at charts of things like the XBI, the sector SPDR S&P ETF, and my thinking is if it gets back to the mid-$70s, that's really a better risk-reward to buy into dips versus thinking you chase it here," he said Friday on "Trading Nation."

Since the beginning of the year, the XBI has surged nearly 15 percent as of early Monday.


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more