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STOCKS OF BIOTECHNOLOGY companies have been lagging the broad market for most of the year.

And the benchmark NYSE Arca Biotechnology Index will show a small loss for the month of August, despite a 30% plus gain by one of its key components, Human Genome Sciences (ticker: HGSI),

This lackluster performance during a month when the broad market forged higher highs in its rally off the March low suggests that the good tidings are not spread to all sectors. And with the prospect of some measure of healthcare reform coming down the pike, there is even doubt over the sector's ability to maintain its franchise.

Congress is considering opening up "biologics," a huge moneymaker, to generic competition. Unlike traditional drugs, which are made from chemicals, biologics use living cells to treat diseases.

While the NYSE biotech index has been the standard for measuring the sector's performance, Human Genome Sciences has grown to 22% of the index's weighting. And when HGSI soared in July and again this month, as mentioned earlier, it skewed the index chart.

To get around this problem, we can look at the actively-traded iShares Nasdaq Biotech ETF (IBB), which has a very small weighting in HGSI (see Chart 1).
 Technically, this ETF scored a solid upside breakout on July 23, a few days after Human Genome Sciences exploded higher. On that day, it moved above the top of the giant trading range it had occupied after crashing down in September 2008. And in mid-August, it pulled back to bounce off that same level in what chart watchers call a successful test of the breakout. Investors that missed the first move got their second chance to get in on the action and were rewarded with roughly a 5%-6% gain.

Unfortunately, the late August rally fell short of setting a new high. Momentum and volume statistics had weakened to change the tone from bullish to bearish. And the 75 level, which was the breakout level in July, is now key once again.

If the ETF drops below this price, it will trigger several technical sell signals. These include a lower low following a lower high, a failure to hold its July breakout and a downside break of the rising March trendline. Such a confluence of signals cannot be ignored.

The HGSI news in July was a spark for the sector and the sector responded. By giving it all back with a move under 75, the sector will show that the tide of company specific news cannot raise all boats in the sector. .

On July 23, Celgene (CELG) closed higher by 16% on good fundamental news and a reaffirmed outlook (see Chart 2). This left a gap on the charts as prices jumped from one level to the next and it is usually a very bullish sign. Indeed, it was not the only biotech to "gap up" in July so something about the sector appealed to investors last month.
 But Celgene was only able to rally for a few more days before setting another gap on the chart. This time, it was a bearish event as prices jumped from a higher price to a lower one. The stock has been trending lower ever since and the market seems to be rejecting the good news it formerly cheered in July.

To be sure, not every biotech has put out warnings signs. For example, Nektar Therapeutics (NKTR) continues to rally and touched another new 52-week high Monday morning. Momentum remains solid and volume statistics have actually improved over the past two weeks.

But Nektar is the exception. The majority of major names in the sector are showing cracks.


Biotechs Not Showing Much Life


