I don’t know what they’re teaching kids these days. Let me rephrase that. I don’t understand a lot of what they are teaching kids these days. At the end of the last school year I was thrust into action quizzing my daughter as she studied for her final exam in Honors Biology. Hey, always glad to lend a helping hand. But it got a little troubling after awhile.
Oh, don’t worry, she was getting almost all of the answers correct. The problem was the unease I felt as I read the questions. For much of the time I didn’t even understand the questions I was asking. I am pretty sure all of the words were in English but at one point I suddenly wondered if I was speaking in tongues.
So yes I am sad to say, I apparently “Don’t know much biology.”
Still, in the immortal words of Lynyrd Skynyrd, “I know a little ‘bout it.” And as it turns out, it might just be enough.
Biology – A Potential Cure for the Summertime Blues
Historically, the stock market has a tendency to hit the doldrums during the summer months. And while this is a topic for another day (Note to myself), the bottom line is that since about 1950, the stock market is about breakeven during the combined months of June, July and August. Still there is often a late summer glimmer of hope offered up by biotech stocks.
Specifically, biotech stocks have shown a tendency to rally between:
-The close of the 7th trading day of August, and;
-The close of the 9th trading day of September.
Figure 1 displays the growth of $1,000 invested in Fidelity Select biotech (ticker FBIOX) from the close of August trading day #7 through the close of August trading day #9 since 1989.
Figure 1 - Growth of $1,000 invested in Fidelity Select Biotech (FBIOX) between August Trading Day 7 and September Trading Day 9 (1989-Present)
This year the potentially bullish period extends from 8/9/2012 through 9/14/2012.
Figure 2 displays the year-by-year results using ticker FBIOX.
Figure 2 – Year-by-Year; FBIOX during Bullish Aug-Sep Period
For the record, regarding FBIOX between August trading day 7 and September trading day 9:
-The average gain was +5.0%.
-The median gain was +5.3%
-Number of times this period showed a gain = 19 (83% of the time)
-Number of times this period showed a loss = 4 (17% of the time)
An Alternative
If you want to trade an ETF instead of FBIOX, the top choice is iShares Nasdaq Biotech Index (ticker IBB). IBB has a correlation of about 98 with FBIOX. The performance of IBB during the last three “bullish” periods appears in Figure 3
Figure 3 – IBB with Aug-Sep Bullish Phases highlighted
Summary
As always, the key thing to remember about any seasonal trend is that it “may not work the next time around.” I was reminded of this recently in Natural Gas and Soybeans. Fortunately, in both of those case I looked to a limited risk option trade rather than “betting the ranch.” Which reminds me to mention:
Jay’s Trading Maxim #106: Traders who have a proclivity for “betting the ranch” – so to speak - invariably end up “renting a small apartment” – so to speak.
So as 8/9 gets closer, a limited risk trade using options on IBB might be worth a look.
Now if you will excuse me – I have to get back to the lab.
Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
NOTES:
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