The Dow Jones U.S. Biotech Index recently closed at the best level of 2008 as the Dow Jones Industrial Average traded at a new yearly low. The relative strength shown by the biotech stocks makes this a sector that investors should be focusing on for the second half of the year.

Stock Selection
The issue that many investors have with investing in biotech stocks is the great disparity between the top and bottom performers in the sector. For example, through the first six months of 2008 the top performing biotech stock in the Nasdaq Biotech Index was Idenix Pharmaceuticals (Nasdaq:IDIX), which rose 169%. The stock on the opposite end of the spectrum was Genitope (Nasdaq:GTOP) with its loss of 95%. As you can clearly see the most important aspect of investing in the biotech sector is stock selection.

Next we will examine five biotech stocks that have shown a strong combination of both fundamental and technical qualities. (For more on choosing a stock based on these characteristics, read Blending Technical And Fundamental Analysis.)

The Biotech Watchlist
Genzyme Corporation (Nasdaq:GENZ)
Genzyme is one of the larger biotech firms in the world. The company's No.1 product is a treatment for a rare disorder called Gaucher's disease. The drug, Cerezyme, generated revenue of $1.13 billion in 2007, nearly double the next largest selling drug, Renagel. Some of its drugs in the pipeline that are promising focus on stem cell transplant and multiple sclerosis. Technically, the stock has been in a solid uptrend since bottoming out in 2002 and recently broke a short-term downtrend and is within 10% of the all-time high of $82 set in January.

Gilead Sciences (Nasdaq:GILD)
Speaking of strong technical setups, for the last 14 years Gilead has remained in a long-term uptrend that continues to move the stock higher through both bull and bear markets. The company is best known for the drug Tamiflu and its host of HIV drugs. In 2007, more than two-thirds of Gilead's sales came from its HIV drugs. Because HIV continues to be a worldwide epidemic, the demand for Gilead drugs should remain high into the future.

Illumina (Nasdaq:ILMN)
Since 2003, Illumina has rivaled Gilead for the best chart of any biotech stock. An increase of nearly 5,000% in five years is not a shabby return. The company is in the business of genetic research, which is one of the areas within biotech that is cutting edge and has a lot of buzz. The beauty of Illumina's business is that it sells equipment to the biotech firms and therefore does not rely on one drug to keep sales growing.

Martek Biosciences (Nasdaq:MATK)
The chart of Martek is quite different from the previous two stocks. After trading in a downtrend for three years, the stock broke out in mid-2007 and has been moving higher ever since. What the company does also differentiates it from other biotech companies. It develops nutritional oils from microalgae and fungi that are then used in everything from vitamins to baby formula. In June, the company reported an 89% increase in second-quarter profit, but also warned the third quarter will see a slowdown. The key is to use the volatility and dips in this type of stock as buying opportunities. (To learn more, check out Understanding Volatility Measurements.)

Savient Pharmaceuticals (Nasdaq:SVNT)
Savient is one of the few companies that can brag it is hitting a new all-time high as the overall market breaks down. The company focuses on two main areas: involuntary weight loss and gout. It only has one drug on the market currently, Oxandrin, used to tread involuntary weight loss from surgery, HIV, or other disorders. Savient's gout drug has received orphan status from the FDA and hopes it will receive full approval later this year.

The Biotech Risk Factor
What investors need to realize about biotech stocks is that many of them will be swayed by the sales or approval of one or two drugs. Because of this reliance on such a narrow product base, it is important to understand the volatility and risk that accompanies investing in biotech stocks.

For more on using technical analysis to evaluate biotech stocks, read The Ups And Downs Of Biotechnology.