How to Prep for the Inevitable Bursting of the Biotech Stock Bubble

2. Do not fall in love with a stock.

Combining a biotech bubble with emotional trading is a recipe for disaster. A recent example is Sarepta Therapeutics (SRPT), which popped to over $45 on very compelling muscular dystrophy data and an incredibly heartwarming story of a drug that helps seriously ill kids. After spiking over 200% ($15 to $45) the stock has corrected to the $30 level. Traders who did not check their emotions at the door and bought into the hype of the stock are now down 30% or more. There is nothing wrong with taking profits and moving on to the next trade. Traders should trade, not invest.

3. Watch closely for signs of a market shift.

Biotech mania in full swing doesn't necessarily mean that a correction is imminent. The bullish trend can continue. Trade with strategies that work for you, but when the market starts to shift, be ready to shift with it. Monitor the price action of upcoming biotech run-up stocks and overall trader sentiment. While I don't believe in over-analyzing macro trends, you need to be aware of coming market-moving events like the U.S. presidential elections and the risk that our economy goes over the so-called "fiscal cliff."

4. Be prepared to quickly change your trading strategy.

If the market shifts, a biotech trader needs to be prepared to make quick adjustments to stay profitable. In bear markets, shorting the spike on any piece of positive news was very profitable, as people were quick to take profits and move on. If/when the biotech market shifts, I'm ready to make the following adjustments:

Limit run-up trades to FDA approval decision and advisory panels. No NDA filings or clinical trials with solid fixed dates for data release.

Hold off buying until closer to the catalyst. For example, instead of going long on a position 4-5 months before a PDUFA date, wait until 6-8 weeks prior.

Aggressively short positive news on biotechs that have experienced a run-up.

As a trader you need to be prepared and ready to trade in any market, bear or bull. Having a plan ready and staying aware of market conditions will allow you to maintain profitability while "shoeshine" traders are struggling.

Messier has no positions in stocks mentioned in this column.

Mark Messier is the founder of BioRunUp.com. Messier is a DOJ-certified Criminal Intelligence Analyst and former IT professional, specializing in law enforcement applications. In 2008, Messier began trading biotech stocks, using his analytical expertise to detect and capitalize on human and market patterns. Starting with only $2,200 in his trading account, he has booked over $400,000 in profit in just 4 years. In April 2010, Messier founded the subscription-based stock-trading web site BioRunUp.com to share his biotech trading ideas with the online investor community. Messier enjoys spending time with his wife and two young boys and visiting his "home away from home" in Costa Rica.

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