Below are three charts that show the behavior of biotechs following losses of 40% or more.  These aren't seasonal charts...we simply gathered data for a large number of biotechs immediately following a disaster.  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 a failure of a clinical trial.  To qualify for the list, stocks must have lost 40% or more over a one day span.  The data was doubly-screened for stock splits that might bias the results.  The data was gathered over the period 1996 to 2003.

The first chart below averages the normalized stock prices of 28 stocks and follows their behavior for three years.  The chart shows an average gain of 500% at the end of the three year period, though we should point out that this figure is biased by the monstrous gains of just a couple of the stocks examined. 

The second chart averages the prices of 52 stocks and follows their behavior for 10 months.  What we find notable in the first two charts is the relative flatness in the charts until about 6 months after the initial price decline.  It would appear that these stocks aren't the best bottom fishing candidates.

The final chart averages the prices of 52 stocks and follows their behavior for 1 month.  The average biotech popped about 2.5% on the day after the disaster, but dipped in the five days thereafter.  The individual performances of the stocks in question varied widely, of course...we saw some situations where the stock popped 30% on the day following the loss, and others where the stock continued to drop in a big way in the following session.

Not shown on the charts is the performance of these biotechs prior to the big loss.  We looked at 74 cases...the average biotech lost about .7% on the session before the debacle, was flat two days before, lost .8% three days before, lost 3% in the month before, 6% in the 3 months prior, and gained 29% in the year before.  The individual cases, of course, varied widely, but one might speculate that we see a nice run-up on anticipation, which loses steam as insiders become aware of forthcoming bad news.

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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