Biotech stocks explode in late rally

Google FinanceNasdaq Biotech Index vs. S&P 500.

It was a great afternoon for biotech stocks.

The Nasdaq Biotechnology Index, which includes companies like Amgen and Illumina, reversed earlier losses on Wednesday and surged as much as 7% from the session’s lows.

The index jumped 2.7% for the day.

The gains, which led a recovery in the broader market, come after a slump that had knocked one-fifth off the index. Although there wasn’t any specific trigger for the rally, traders offered up two fairly straightforward explanations.

1. This could be people covering their short positions

It’s been a good year to have a short position against biotech stocks, and some investors were probably closing out early bets against the sector. It’s called short-covering and involves buying shares that were sold when prices where higher.

“My guess is what you’re seeing right now is some short covering,” Paul Yook, a portfolio manager at BioShares Funds told CNBC. These short sellers had bet on a drop in biotech stocks, but after a 15% plunge in the index this year, they’re ready to take profits.

2. Long-term investors could be back in the game

But not everyone is getting out of a position, of course. One analyst who asked not to be named told Business Insider that biotech investors who’ve watched the index fall over the past few months — amid worries about drug pricing and a broader move away from relatively risky investments — see the opportunity to move.

It’s worth noting that January’s drop wasn’t the first for biotech stocks in recent months. Even after the rally the index is down almost 30% from its highest point, reached last July.