Sunday, July 14, 2013

What's the best Biotechnology stock to trade in the S&P 500?

I'll just go ahead and get my disclaimer out of the way up front and say that I do not have any open positions in any of the stocks mentioned in this blog, nor do I intend to open any any of these stocks in the next 72 hours.

Glad that's out of the way.

So, until about 3 months ago, I never asked myself which Biotechnology stock in the S&P 500 would be the best to trade.

The universe was just too big. So many stocks to research and trade, so little time.

But now I know how to write code.

And the universe just got a lot smaller.

Or my head got a lot bigger...

Either way, I wrote a program in Python that ranks (at the push of one button) all of the stocks in the S&P 500, plus all of the sectors and sub-industries within the S&P 500, from top to bottom using historical return/risk ratios.

Sure, I probably could have bought a program to do what I wanted, but where's the fun in that? I like to re-invent the wheel whenever I get the chance.

My program uses the long-term trend-following algorithm for which this blog is named to generate buy and sell signals, and I've been trading for 10 years, so I run my tests back to the beginning of 2003. That seems like enough time/data to create some statistical significance. 

It will compute 10+ ratios so far, and for this post I planned to include tables for Sharpe, Sortino, and Omega Ratios, thinking the comparisons would be interesting.

But on second thought, that's probably too much information.

For now, let's just look at the results using the Omega Ratio.

To be honest, the Omega Ratio is kind of new to me, but I think it's interesting because the calculation (Cumulative Weekly Gains above the required rate of return / Cumulative Weekly Losses below the required rate of return) includes all of the returns in the distribution, which means it can account for the high risk/low probability fat tails that are not part of a normal distribution.

FYI - I'm using a 12% annual (0.22% weekly) required rate of return.

In any case, if anyone wants to see the results in Sharpe, Sortino, or any other ratio that you can think of, just let me know. I'll be happy to run and send that along.

Okay, so which Biotechnology stock in the S&P 500 is the best trade?

RankSymbolCompanyCumulative Weekly Gains %Cumulative Weekly Losses %Omega Ratio
1 GILD Gilead Sciences+615.26%-485.39%1.27
2 ALXN Alexion Pharmaceuticals+768.97%-621.65%1.24
3 CELG Celgene Corp.+242.25%-196.02%1.24
4 AMGN Amgen Inc+193.75%-157.01%1.23
5 LIFE Life Technologies+335.65%-312.81%1.07
6 BIIB Biogen IDEC Inc.+514.90%-486.40%1.06

Gilead Sciences?

That surprised me too. 

But there's a reason I research and trade with algorithms and quantitative data and not my gut.

My gut is not very smart.

So... anybody out there trading Gilead Sciences?  

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