×

Biotech was 'late to the party, but partied hard' — and beware the hangover

The IBB, an ETF that tracks biotech stocks, has fallen nearly 11 percent this month — and could be headed lower.

"To us, this is really a story about market sentiment," Max Wolff, market strategist at 55 Capital, said Friday on CNBC's "Trading Nation."

Biotech is a high-risk space that shot up quickly, Wolff said. The iShares Nasdaq Biotechnology ETF, the IBB, hit an all-time high last summer and has since tumbled as drug manufacturers' pricing has come under scrutiny. The presidential election has weighed on the space, too; biotech rallies have suffered after remarks made by Democratic candidate Hillary Clinton addressing drug pricing.

Wolff said that investors have moved out of the space "aggressively" as they've realized "more risk doesn't necessarily mean more return."

"So there is some political risk, but here we really think this is about a retreat from risk assets, particularly risk assets that were late to the party, but partied hard, and that would be a reasonable way to describe the folks in the biotech space."

It may be too soon to tell whether the IBB is going to break below a key level of support at $240, which would "suggest a whole other leg lower," said Craig Johnson, senior technical research analyst at Piper Jaffray. The ETF was trading around $257 on Monday.

The IBB began a "meaningful downtrend" from its highs in July 2015, Johnson said Friday on "Trading Nation."

"However, starting in July of this year, you can see on the chart there was a clear downtrend reversal that started to move higher, brought in a lot of investors. Now, since then, it has rolled over," Johnson said, noting the ETF appears to be close to "retesting" that $240 mark.


Johnson sees that level of support holding, though he said the large-cap stocks within the ETF are weighing on the fund.

"About half of the weighting in this ETF is in 10 stocks, and those are all the large-cap names inside of this. It's the mid-, small-cap stocks inside of the biotech world that are doing the best, and the larger-cap names have been a lot weaker," Johnson said.

The top holdings in the IBB include giants Celgene, Gilead, Biogen and Amgen. Mylan, which is down nearly 32 percent this year following backlash upon raising the price of its EpiPen, comprises nearly 4 percent of the IBB as its seventh-largest component.


Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more

Connect