One of the market’s darling sectors has been biotechnology — a group investors have bid higher in anticipation of potential changes by the new presidential administration.

The effect has been a relative strength leader that has bested the market by more than 30% during the past six months.

While I’ve liked a few of biotech companies, the sector’s current situation causes some concern.

>

The Biotech HOLDRs (BBH), an exchange-traded fund (ETF) that serves as a proxy for the sector, has been trending sideways since the beginning of the year, indicating that some of the buying power that has driven these stocks higher may be tapped, at least over the short run.

More concerning is the fact that sentiment toward biotech is tending to the optimistic side.

For example, the current analyst recommendations for Amgen (AMGN), Genentech (DNA), Gilead (GILD) and Genzyme (GENZ) shows an average of 85% “Buy” recommendations. That’s extremely high, given the market’s condition.

Similarly, the options activity for these stocks has an overly optimistic skew, as calls have been trading more heavily than puts.

For now, I’m not ready to call a top on the group, but it’s definitely on my warning list.

Chris Johnson is the co-editor of The Winning Edge trading service designed to help you make options profits around corporate earnings and other market events. For more information about Chris, read his bio here.