Update: At 11:15 am EDT, the Nasdaq Biotechnology Index is down 5%. To answer my own question below, it seems like investors woke up Monday ready to sell. Those scary-looking charts will need to be updated after the close.
Friday's 4%-plus drop in biotech stocks was fun. Ready for Monday?
Let's take a look at where things stand.
The Nasdaq Biotechnology Index (NBI) ended February up more than 16%, but remember, stocks were very weak on the last day of the month, leading to some questions about how the sector would perform in March. Not so great, it turns out...
IBB data by YCharts
The biotech sector is still outperforming the broader market for the year, but the February gains are gone.
IBB data by YCharts
I thought this next chart was really interesting. It overlays the performance of Gilead Sciences ( GILD) and the IBB: Almost perfect synchronization. This chart shows you how pushback against the $1,000-per-day price of Gilead's hepatitis C pill Sovaldi can spread fear across the entire biotech sector. [I checked the IBB against the other big-cap biotech stocks Celgene ( CELG), Amgen ( AMGN), Biogen Idec ( BIIB) and Alexion Pharma ( ALXN) but didn't see the same pattern.]
GILD data by YCharts
Where does the sector go from here? Do investors buy Friday's dip or will we see more weakness? Obviously, I don't have an answer, no one does. But for those downplaying the significance of the Gilead-Sovaldi price controversy, I'd say remember that biotech stocks, like most sectors, trade not only on fundamentals but on sentiment and the confidence in future earnings potential. Those arguing against a biotech bubble say price-to-earnings (P/E) ratios for biotech stocks are nowhere near historical highs. True, but if investors -- particularly generalists investors -- worry about the sustainability of drug pricing, then confidence in the future "E" of the P/E ratio falls. We call that "P/E compression" and it's not a good thing for stocks.
ISI Group drug analyst Mark Schoenebaum took to Twitter this weekend to make a similar point: