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Below are three charts that show the behavior of biotechs following gains of 40% or more. These aren't seasonal charts...we simply gathered data for a large number of biotechs immediately following a large one day gain. Ignore the dates on the X axis, except as an indication of the time spans involved. All the prices were normalized to 100 on the day following the price decline...this way, the behavior of relatively expensive biotechs doesn't overpower that of cheap biotechs.
Most, if not all, of these "disasters" involve good news from the FDA or strong results from a clinical trial. To qualify for the list, stocks must have gained 40% or more over a one day span. The data was gathered over the period 1993 to 2003.
The first chart below averages the normalized stock prices of 29 stocks and follows their behavior for three years.
The second chart averages the prices of 45 stocks and follows their behavior for 12 months. As with our charts that detail the behavior of biotechs after a big loss, one notes relative flatness in these stocks for a period of several months after the price "shock". In both cases, one might say that investors are at a loss for what to do next. One could speculate that this sort of behavior might be common after price shocks in stocks from any industry.
The final chart averages the prices of 45 stocks and follows their behavior for 1 month. The average biotech loses money in the weeks after a large one-day gain.
Not shown on the charts is the performance of these biotechs prior to the big gain. We looked at 45 cases...the average biotech lost about 1% on the session before the gain, was flat two days before, lost .7% three days before, lost 1.2% in the month before, 10% in the 3 months prior, and lost about 2% in the year before. These numbers are similar to those associated with our "big loss" biotechs, with the exception that the big losers tended to have stronger yearlong performances prior to the cataclysm.
Obviously, a large gain on the day prior to the big day doesn't necessarily signal a forthcoming monster gain or loss. However, we did find that the close-low spread can be revealing...the big winners tended to have a large spread, while the losers tended to close nearer their lows for the day.
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Given the interest in biotechnology stocks, we offer a list of other charts that may be of interest to biotech investors. Outside of a couple major yearly conferences, there would seem to be little of a seasonal nature to drive biotechs. However, there certainly does seem to be some seasonality in investor's risk tolerance, and biotechnology stocks are nothing if not risky. At the same time, drug makers are somewhat immune to certain macroeconomic forces. We'd also point out a "give and take" relationship between volatile biotechs and semiconductors. In the end, this group of stocks has some unique characteristics that serious investors should be aware of.
The biotechs below are "pure"...we haven't included medical device makers, or large pharmaceuticals.
Potential investors should utilize our seasonal charts in conjunction with other indicators of future success. Our tests do seem to indicate that these charts can increase the likelihood of profitable trades, but these charts certainly should not be taken as the "end all and be all" of successful trading.
The yearly seasonal charts are compiled by simply averaging all historical percentage gains/losses for the first day of the year, second day of the year, etc. The quarterly and monthly charts are compiled in similar fashion, but this time we overlay the days of the quarters and months, as opposed to days of the year. The quarterly charts are particularly useful when viewed in light of quarterly earnings and dividend milestones.
Feel free to request additional charts (in moderation): khodge @ stockwarrants.com .
For more background and caveats on our charts, visit our main "seasonal charts" page.
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