Blog - Investing Notes

June 26, 2009 - Update: Biotech Seasonality?

In an August 2004 article entitled "Time is Right for These 7 Biotechs", Jim Jubak states: "...in most years, biotechs decline in the spring as investors anticipate a summer hiatus in the conferences where new clinical results are announced. They rally in the fall as the conference schedule and the volume of news increases." Is this conventional wisdom correct? To check, we examine the behavior of the AMEX Biotechnology Index (BTK) across the calendar year. Using monthly closing levels for BTK from its inception in January 1995 through most of June 2009 (14.5 years), and contemporaneous monthly returns for the S&P 500 Index for detrending, we find that:

The following chart shows the raw mean and median returns by calendar month for BTK from its inception in January 1995 through June 2009. The average monthly return for BTK for all months in the sample is 1.8%. A large difference between the mean and median returns indicates that one or a few very extreme months drive the mean. For example, 10 of 15 Februaries in the sample have negative returns, but an extremely large positive return in February 2000 makes the mean return positive. Note that, based on raw returns:

• Late winter (January-March) may be the weakest for biotechs.
• While starting slowly, biotechs perform pretty well during spring (April-June).
• Summer starts slowly (July) but finishes with strength in August-September.
• Fall is relatively weak (October-November) until December.

Is biotech seasonality distinct from that of the overall stock market?

The next chart shows the detrended mean and median returns by calendar month for BTK from January 1995 through June 2009, with detrending accomplished by subtracting the return for the S&P 500 Index from the return for BTK each month. The average abnormal monthly return for BTK for all months in the sample is 1.3%. Again, a large difference between the mean and median returns indicates that one or a few very extreme months drive the mean. Note that, based on detrended returns:

• During late winter (February-March), biotechs underperform the market.
• During most of spring through mid-summer, biotechs roughly match market performance.
• During late summer, biotechs outperform the market.
• During most of the fall (October-November), biotechs are relatively weak.
• Biotechs outperform during December-January.

The most pronounced unique seasonality characteristic of biotechs is perhaps strength in late summer.

For both raw and detrended data, sample size for each calendar month is very small, such that one or two additional observations could substantially change the mean returns.

In summary, very limited evidence suggests that biotech stocks tend to be weak in late winter, strong in late summer and December, and weak during most of the fall. The late summer strength is most distinctive.

For related research, see Blog Synthesis: Calendar Effects and the Trading Calendar.