For the biotech sector, it feels like late September.

Battered biotech stocks are revisiting the lows last seen in the weeks after the terrorist attacks in New York and Washington, D.C. And like those pessimistic times, there are few biotech traders on Wall Street willing to step up and buy.

But on a brighter note, there were good signals Friday that the sector might be hitting a bottom, observers say. So when do biotech stocks start rising in a significant way? Unfortunately, that's a question few are brave enough to answer.

"When it's raining outside for as long as it has, it's hard to think about seeing the sun tomorrow," says Jon Alsenas, fund manager at ING Furman Selz Asset Management, summing up the doldrums gripping normally buoyant biotech investors these days.

Real numbers bear witness to the troubles. The bellwether Amex Biotechnology Index slumped Friday to an intraday low of 423.44, a level not seen since the opening of trading post-Sept. 11. A small recovery was staged at midday, but it petered out at the end of the day. The index closed Friday at 428.94, which dropped it 11% for the week and 25% for the year.

Friday is certainly a day diehard biotech investors want to forget, but a recap of the carnage is instructive to understand what might lie ahead. The day actually opened with some optimism because Amgen ( AMGN), on Thursday night, capped off what was a mediocre biotech earnings season with a relatively strong report, including a bullish boost in guidance for sales growth.

But whatever good mojo the No. 1 biotech firm sprinkled on the sector early vanished fast as rumors spread that one or more big biotech funds were being hit with redemptions, forcing the funds to liquidate large positions. No one seemed able to pinpoint exactly who was in trouble, but it didn't really matter, as fund managers all over Wall Street began selling.

One Thing Leads to Another

That led to across-the-board losses Friday: Amgen, despite good news, fell 2.5%; Genentech ( DNA) fell 4%; Cephalon ( CEPH) dropped 5%; Gilead Sciences ( GILD) lost 9%; Idec Pharmaceuticals ( IDPH) was off 4%; and Genta ( GNTA) dropped 9%.

But the selloff may have also signaled capitulation.

"When you start hearing rumors about this fund or that fund going out of business, it usually signals that we're at a bottom," says Robertson Stephens senior biotech analyst Mike King. "I think we test the 400 levels of the Amex Biotech Index , but we should hold."

Stabilizing the sector is one thing, but getting it to move up in a meaningful way still requires courage not in abundance these days.

Biotech Hits the Floor
A test of post-Sept. 11 lows is in the offing
Source: Yahoo! Finance

"There is just no conviction in the market right now," says one biotech hedge fund manager. "I certainly don't want to be the first one in so I can get run over."

Another fund manager, exasperated by indiscriminate selling, even pines for the good old days when sell-side analysts led cheers for stocks -- and investors listened.

"Some of the selling Friday morning was crazy, but as we reached Sept. 11 lows, I didn't get one phone call, or one email, from any analysts supporting the sector," he says. "Analysts are so skittish these days that they're scared to say anything. The machine is broken."

The problem, of course, is that many of the marquee biotech stocks still aren't cheap. Genentech stock has fallen about 20% this year, but the company still trades at 40 times 2002 earnings. Idec Pharmaceuticals is one of the fastest-growing companies in the sector, but how excited can investors get when the stock -- down 17% for the year -- trades at 61 times 2002 earnings or 45 times 2003 earnings?

In fact, the only profitable biotech company that looks somewhat attractive these days is Biogen ( BGEN), which trades at a relatively cheap 20 times 2003 earnings. But Biogen is loaded with risks. The bull story gets really ugly if its psoriasis drug, Amevive, doesn't get approved later this year.

But this negativity won't last forever. Fund manager Alsenas says investors have to pick themselves up off the floor and get back in the game like they did post Sept. 11. That means looking for stocks with good growth stories that have been trampled, unfairly in today's bear market.

"Six months from now, I don't want to be kicking myself for not owning these stocks," he says.

Alsenas says he's buying CV Therapeutics ( CVTX) because its heart drug, Ranolazine, will be a winner, despite a lot of naysayers who believe otherwise. He also likes Scios ( SCIO) -- yes, it has a lofty valuation -- but its heart drug, Natrecor, should continue to surprise Wall Street with better-than-expected growth.

This is a start, but the biotech sector needs more good news, and more buyers, before it gets its shine back.