The 5-Sigma Report

The market has handed investors some nice, consistent returns over the long run, but in the short term it can often be as unpredictable as an episode of The Real World. In a pair of articles, I explored the market's so-called "fat tail" distribution -- the tendency of stocks to make huge moves that seem extremely statistically improbable. Since then, I've been following "5-sigma moves," or one-day price moves that are five standard deviations or more from a stock's average one-day change.

Keep in mind that we're looking at the price change relative to the stock's historical volatility, and not just the same old jittery "most active" stocks. So even though stocks like MedImmune, Sinopec Shanghai Petrochemical, and Jones Soda saw some big movement last week, you're not going to see them on this list because of their higher average volatility.

Here's a taste of a few of the 5-sigmas from the past week:

Rocket science?
So what's so great about Dendreon anyway? It's not like it's curing cancer. ... Oh, wait, yes it is.

It would be tough to have missed the small but soaring Dendreon as it has painted the skies in recent weeks. On March 29, Dendreon issued a press release saying that the FDA's Office of Cellular, Tissue, and Gene Therapies Advisory Committee had recommended to the FDA that there is significant evidence of safety and efficacy for Dendreon's prostate cancer drug, Provenge. Provenge is exciting because it would be treating the most prevalent form of cancer after skin cancer -- some reports have put the potential market opportunity at more than $1 billion.

The reaction to the news was swift and decisive, potentially spurred on by the high level of short positions in the stock, and the stock jumped 148% the following day. The excitement didn't stop there, either -- the stock finished the following week up another 40%.

Down but not out
Dendreon is no spring chicken as far as biopharma companies go. The company has been around since 1992 and has been listed since the middle of 2000. During that time, the company completed two clinical trials on Provenge with patients who had advanced-stage prostate cancer. Both trials ended rather disappointingly; the primary endpoint of the trials, delay of time to disease progression, was not met with an acceptable statistical significance.

A look at Dendreon's stock chart since it came public gives a pretty good picture of how investors got their hopes up only to have them dashed. The stock was less than $2 in mid-2002 before getting up to more than $15 in 2004, only to sag back down to the sub-$4 range before all this recent excitement started.

Despite multiple disappointments in clinical trials, Dendreon continued its studies and found that while disease progression wasn't convincingly retarded, survival rates in patients did improve. Between the two studies, Dendreon has shown that Provenge has provided a median 23% survival benefit with a high level of statistical significance.

The survival rate of Dendreon
As encouraging as the recent pronouncement was, it's by no means a decisive win for Dendreon or Provenge yet. The support from the FDA advisory panel is helpful, but it wasn't an outright recommendation that the drug be approved. And even if the advisory panel had given that stamp of approval, there's no guarantee that the FDA wouldn't go the opposite way in mid-May, when it will be making the final decision on the drug.

Until then, we may not hear much more out of Dendreon, but that doesn't mean the stock's volatility won't continue. At this point, investors will continue to tweak their probability assumptions on the FDA's go-ahead and move the stock around based on that speculation. Wall Street analysts are also likely to continue to monitor the situation, and any new comments on their part could also have major effects on the stock price.

The one thing that's a really strong bet at this point is that Dendreon will make a follow-up appearance on the 5-sigma list when that May 15 deadline rolls around. So until then ...

Check out what other Fools think of Dendreon at The Motley Fool's CAPS investing community.

Fool contributor Matt Koppenheffer enjoys his weekly statistical rendezvous even more than he likes watching the crazies duke it out on The Real World. He does not own shares of any of the companies mentioned. The Fool's disclosure policy has passed the mandatory drug screening and is cleared to help you continue hitting home runs.