Trader Talk

What's wrong with healthcare and biotech?

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

What's up with healthcare? Biotech, which has been a market leader all year, is weak, with both the market-cap weighted IBB and equal weighted XBI down roughly 4 percent each.

But the entire healthcare complex is weak Monday: medical equipment companies like Stryker, hospitals like Tenent, HMOs like Healthnet or drug distributors like Cardinal Health are all down 1.5 to 3 percent.

This isn't too hard to figure out: biotech is the highest profile subsector of healthcare. Healthcare is the best performing sector of the S&P 500 this year (up over 7 seven percent), so the consensus among traders is there's a bit of "sell the leader."

There may also be some rotation into technology as we got decent earnings last week from Google, Amazon, and Microsoft.

Which brings me to why Biotech is so weak Monday. The main issue is that this is the biggest leveraged long play on the Street.

With that understanding, I see several issues:

1) God help you if you disappoint. Did you see Celadon Monday, a smaller biotech that is down 80 PERCENT on the failure of its gene-therapy drug Mydicar for heart failure? Or Aerie Pharmaceuticals , which is down more than 60 percent in the last two trading sessions after announcing that its lead product, a treatment to lower eye pressure in glaucoma patients, had failed to meet its objectives in a late-stage trial. Biogen also had disappointing earnings at the end of last week.

2) Mylan rejecting the Teva offer is certainly taking some of the takeover premium out of the healthcare sector, but I think another soured deal is just as important: Applied Materials announcing it was calling off its merger deal with Tokyo Electron, due to problems with the U.S. Department of Justice.

This was an even bigger surprise than Mylan. There were a lot of traders long AMAT.

My point is this: killing both of these deals is causing de-risking in other sectors and stocks where there are "consensus longs."