The slow drift lower continued Tuesday amid nervousness over myriad issues, including: the timing of
tightening, mutual fund withdrawals, rising trade tension between the U.S and major trading partners, and some disappointing corporate news. Broader market declines were modest, in keeping with recent trends. But there was more significant damage in specific areas, notably biotech.
Dow Jones Industrial Average
fell 0.2% to 9737.79, while the
slipped 0.1% to 1046.57 and the
fell 0.6% to 1930.75. The closure of Treasury markets in observance of Veterans Day contributed to a holiday-type atmosphere in equity trading; fewer than 1.2 billion shares traded on the
and 1.6 billion in over-the-counter trading.
Still, the profits and losses on slow days don't get marked with asterisks and the decline was the sixth in the seven sessions since the Dow and the S&P 500 each hit multimonth highs on Nov. 3. Notably, the S&P 500 closed within 10 points of the closely watched 1050 level for the 11th-consecutive session. A bullish spin is that the index is basing and preparing for a sustained move above 1050, while skeptics contend its recent struggle is a signal the index has peaked around the same level.
The S&P's fate remains, of course, to be seen. But bears can point to action in the biotech sector as a potential harbinger of things to come for the broader index. If biotech is a leading indicator of the sentiment of momentum traders, as many contend, the past two days suggest a serious bout of concern has infiltrated their ranks.
"There are lots of moans and groans from the momentum traders," commented
James De Porre, a self-described member of the momentum crowd. "Even though the indices aren't down as much as they were
Monday, a lot of the momentum favorites are being hit with an ugly stick."
De Porre attributed the ugliness in part to the thinness of trading and the fact "when the going gets tough, the momentum traders tend to run and hide. They are not brave souls when it comes to holding through pullbacks."
lack of bullish conviction among many equity traders, it will be interesting to see if they are willing to stay the course if the broader market's recent decline continues or accelerates.
Just as the S&P 500 is struggling to remain above 1050, the Amex Biotech Index seems to have a hit a ceiling at the 500 level, where it has been below since mid-June even on an intraday basis, observed John Roque, senior analyst at Natexis Bleichroeder and contributor to
. While many names in the sector have tested their 50-day moving averages, bellwether
already has fallen below its 200-day moving average, he noted, suggesting the BTK has risk to 400 and Amgen to 50.
On Tuesday, the Amex Biotech Index fell 3.1% to 437.29, its second-straight decline of more than 3%. Fundamental developments contributing to Tuesday's decline included
announcement that clinical trials of its experimental rheumatoid arthritis drug were going to be suspended because of adverse side effects. Veretex shares fell 37% on the news.
Secondarily, Amgen said it no longer would work with
on a treatment for non-Hodgkin's lymphoma. Amgen fell 0.3% while Immunomedics dropped 53%.
Beyond those company-specific developments, some (including
contributor Doug Kass) speculated weakness in biotechs could be attributable to liquidations by
. For the week ended Friday,
Marsh & McLennan
announced that $14 billion was withdrawn from its Putnam unit, which has been charged by both the
Securities and Exchange Commission
and Massachusetts regulators in the investigation of illicit mutual fund trading. Marsh & McLennan shares fell 1.7%.
But some biotech investors said the recent declines are unlikely to stem from forced selling at Putnam, and are more likely reflective of a cyclical move toward more economically sensitive areas.
"I would be surprised if Putnam targeted this group more than others," said Jon Alsenas, a managing director and biotech fund manager at ING Furman Selz Asset Management. He chalked up the decline to the "dings" from Vertex and Immunomedics, as well as a maturation of the cycle, which generated so much interest in biotech names earlier in the year. (Alsenas' fund has no positions in Vertex or Immunomedics, but he declined to discuss its size or performance.)
"If the economy is going to continue to expand, biotech
stocks aren't classic beneficiaries," Alsenas observed. "People are going to cyclical stocks,
they're going to retail for the holiday season. Take your pick."
On Tuesday, retail stocks were picked by many after Merrill Lynch upgraded several stocks in the sector, including
May Department Stores
reported better-than-expected quarterly results. The S&P Retail Index rose 0.4%.
In concert with the classic sector rotation, Alsenas also noted there was a "ton of interest and money" last spring from many investors who aren't traditionally involved in biotech. Given often heady gains in many smaller names in the sector, he suggested many of those investors are now taking profits, both reacting to and contributing to the group's recent weakness. A recent spate of secondary offerings in the sector at a time of reduced demand has further contributed to the exodus.
"When money comes in
to biotech, stand back. When it leaves, there's quite an undertow that's created," he said. "Nobody wants to be the last one to turn out the lights. Take your gain and be happy."
Heading into the final six weeks of what has been a very strong year for stocks overall, the risk is that more portfolio managers will reach similar conclusions with their broader equity holdings. That has not been the case to date, but recent developments in biotech provide a blueprint for what
be a surprisingly nasty holiday season for stocks.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.