Updated with current stocks prices and additional comments.

Federal Reserve Chairwoman Janet Yellen, speaking in front of Congress Tuesday, said the valuation of small-cap biotech stocks are "substantially stretched."

Investors reacted immediately. Here's the iShares Nasdaq Biotechnology Index ETF:

IBB Price data by YCharts

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And here's the SPDR S&P Biotech ETF, which includes more small-cap biotech stocks:

XBI Price data by YCharts

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This is what Yellen said about biotech stocks in her prepared remarks to Congress:

Some broad equity price indexes have increased to all-time highs in nominal terms since the end of 2013. However, valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that,in aggregate, investors are not excessively optimistic regarding equities. Nevertheless, valuation metrics in some sectors do appear substantially stretched-particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year. Moreover, implied volatility for the overall S&P 500 index, as calculated from option prices, has declined in recent months to low levels last recorded in the mid-1990s and mid-2000s, reflecting improved market sentiment and, perhaps, the influence of "reach for yield" behavior by some investors. 

Update: Healthcare investor and bio-Twitterati Brad Loncar (@bradloncar) has a very smart take on the Yellen biotech comments. You should read his entire blog post, but he makes four points:

1. She (Yellen) is by far the most important person in finance.  Many market participants listen to what she says and base investment decisions off of them.
2. Her remarks about biotech were not an accident, they were meant to send a message.
3. NY Fed President William Dudley said the same thing about biotech in March, and it likely had a big impact on sentiment about the sector.
4. Only fundamentals matter over the medium and long term, but this can definitely have a real impact over the short-term.

Again, read Brad's entire blog post. Well worth it. 

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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