Sector Watch: Big Pharma Misses Out on the Rally

Not every sector is feeling the benefits of the Fed rate cut.

Pharmaceutical companies, often a safe haven in a troubled market, are moving to the downside during today's massive market rally. While the Dow Jones Industrial Average is soaring more than 400 points and the Nasdaq is gaining more than 200 points, indexes such as the American Stock Exchange Pharmaceutical Index, which is down 2.6% today, show drug companies slipping into negative territory. The Dow Jones U.S. Pharmaceutical Index is down 2.8% so far today. Meanwhile, the Dow Jones U.S. Pharmaceutical & Biotech Index, a combo platter of both drug companies and medical-based tech stocks, is feeling the strong downside pull of the pharmaceuticals, as it has lost 1.4%.

Biotechnology companies, on the other hand, are enjoying a nice run, with the Nasdaq Biotech Index up a solid 6.7% today.

"It's an interest rate thing," says Emily Hall, an analyst at Morningstar. "Pharmaceuticals are often a place where people hide when the markets are nasty."

But when the tables turn and the markets head uphill, funds flow out of the drug manufacturers and into the more Fed-positive sectors, such as financials, tech and cyclicals. Bristol-Myers Squibb(BMY), a big cap pharmaceutical producer, is down $3.21, or 5.4%, to $56.64.

Pfizer(PFE), another big name drug company, reported strong first-quarter earnings this morning, but the shares dropped $1.33, or 3.1%, to $41.10. Merck(MRK) is down $2.62, or 3.2%, to $78.23.

Sector stalwarts Johnson & Johnson(JNJ) and American Home Products(AHP) are both feeling the sector ills today. J&J is down 2.4%, and American Home is losing 2.1%.

Hall sees the move as a "sector rotation out of pharmaceuticals. You don't need them as as much of a safe have as before."

The pharmaceutical sector has been on a pretty steady rise since the end of March, as have other sectors, such as the financials. But should the market continue on an upswing, traders think that the drugs sector will continue to fall.

"For a while they did better than other sectors," says Ned Collins, executive vice president of U.S. stocks at Daiwa Securities America. "People felt like there was a possibility of weakness in the dollar and other problems that they could face in their sales overseas, so this was a good opportunity to get into other areas."

Collins cites the strong liquidity of today's market as incentive for investors to sell their drug stocks and get into areas that may be more profitable in the near term. "With the liquidity in the market today, investors are taking the opportunity to make big plays on big swings," says Collins.

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