A Big Day For Biotech And It's Not Going So Well

After the S&P 500 lost 1.1 percent last week, the worst weekly showing by the benchmark U.S. index in four months, U.S. stocks are once again well in the red Monday.

For those looking for signs of risk appetite being restored, there is potentially ominous news from a marquee leadership group: Biotechnology stocks and the relevant exchange traded funds.

Biotech ETFs languished late last week after Biogen Inc(NASDAQ:BIIB) pared 2015 after it reported disappointing results for an experimental drug to treat Alzheimer's disease. That stock, one of the largest holdings in several biotech ETFs, slid 22 percent last Friday, but is up 4.5 percent on Monday. That's the good news, but the bad news is that two of Monday's best-performing ETFs on a percentage basis are bearish biotech funds.

The Direxion Daily S&P Biotech Bear 3X Shares (NYSE:LABD) and the ProShares UltraPro Short NASDAQ Biotechnology (NASDAQ: ZBIO), two new additions to the leveraged biotech ETF fray, are up 4.2 percent and 3 percent, respectively. One day does not make a trend, but Monday's bullish performances for bearish biotech ETFs could be a warning sign for an industry group that comprises 10.5 percent of the S&P 500's weight.

"For those not keeping score, over the past year, the biotechnology index (NBI) has risen by more than 50% and is now up ~6x since 2009. Why? Because debt is cheaper than it ever has or ever will be, and investors have rewarded companies for putting low-cost cash to work in risky investments, including biotechnology and medical device stocks, which are arguably the furthest out along the risk curve in common stock," said Rareview Macro Founder Neil Azous in a note out Monday.

The NBI to which Azous refers is the Nasdaq Biotechnology Index, the underlying benchmark for the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), the largest biotech ETF by assets. The aforementioned ProShares UltraPro Short NASDAQ Biotechnology (NASDAQ: ZBIO) attempts to deliver three times the daily inverse performance of the that index. ZBIO is just a month old.

Despite ZBIO being in its infancy, risk-tolerant traders might want to give the ETF a look this week if biotech earnings disappoint. Amgen and Gilead Sciences, a combined 15.4 percent of IBB, report earnings this week.

The Direxion Daily S&P Biotech Bear 3X Shares, which is just under two months old, seeks to deliver three times the daily inverse performance of the S&P Biotechnology Select Industry Index. That is the index tracked by the popular (and volatile) SPDR S&P Biotech ETF (NYSE:XBI).

If biotech does not find a way to rise Monday, "then there is a much stronger case that professionals will be defending their books going into Friday in the most coveted of all spacesthat is, biotech," added Azous.

Bearish biotech has been one of the hardest trades over the past six years and has only rewarded the most nimble traders. Every one of the sector's dips have been bought over that time, and even with the recent declines, seven of the top 10 non-leveraged sector ETFs this year are biotech funds.