The first thing that needs to be said is that there are many investing strategies, many differing goals, and many differing tolerances for risk in the stock market. It is actually these factors that help make the market what it is.
One of the next big catalysts for Arena Pharmaceuticals (ARNA) is DEA scheduling of its anti-obesity drug Belviq. The scheduling in and of itself is not really the critical component here, but rather the fact that once Arena's Belviq gets a DEA schedule it can go on the market. However, without DEA scheduling news the product is at a virtual standstill.
Ever since the FDA gave approval to Belviq earlier this year the anticipation has been building up for Arena to launch Belviq. This anticipation has caused the company to literally cycle between the high $7s and the mid $9s. It has been an active trader's dream for months now, while long term holders become more and more frustrated. Patience can be hard. In particular when expectations are so high.
When I invest into an equity I conduct my own research, read a lot, view a lot of opinion, and get a sense for the company. If the fundamentals or concept look good I consider investing. Once invested I continue researching and in many ways become more critical. I look for the chinks in the armor, even if they may seem insignificant. As an investor I understand the potential and tend to not worry about that. What I worry about is my exposure.
With Arena we have a building anticipation of Belviq receiving its long awaited DEA scheduling. As each month passes without news, the warming effect the news will have diminishes to a certain degree. For about a month now I have felt the DEA scheduling will see this equity test $11. That sentiment is not well received by many ARNA longs, but it is what I see.
There is a play here for an active trader. If DEA scheduling is announced, and we see the volume on this equity double on a run up, I would be one to consider looking for an exit point. That's right. A sell on the news. We have all heard the old axiom of "Buy on Rumor and Sell on News". It is amazing that in this day and age such a simple concept is not really practiced by the majority of investors.
When I see a stock pop on volume I look for the point in time where the volume lightens up. Once that happens, an equity is usually at a crest. For an active trader it is a sell signal.
Bear in mind, this strategy has nothing to do with whether I believe that Arena will be a great investment or not. It has to do with making a profitable trade. Typically after a pop on news accompanied with high volume an equity will retrace. This is exactly what I feel will happen with Arena.
You see, the DEA scheduling does not mean that the product hits the pharmacy shelves the next day. There is a comment period, a review period, and the final DEA scheduling. This is when Belviq sales can begin. In my opinion the exuberance of DEA scheduling news will be overdone by the street. The reality that the product launch is still over a month away will be met with disappointment. This is where an active trader would look to get back in.
What you need to remember is that there are many types of investors. While a buy and hold philosophy may suit you personally, it will not suit another investor. When news makes a stock pop it becomes a buying target for many, and a shorting target for many as well. The buyers send the stock on a surge, the surge crests, and then the short traders and active traders hop in. This causes a downward pressure that many call a retracement. Being on the right side of these trades (even if you do not short) can be a very profitable endeavor.
In essence, it is possible for an investor to become a strong seller when the conditions are correct even if they believe strongly in the prospects of the company. If you are a long and strong and holding your shares in a death grip I applaud you. On the same note I applaud the active trader as well. As an investor I do not really care about the company. I care about a profitable trade (either long term or short term).
DEA scheduling could happen any day now. If the news drives this equity on heavy volume and it gets above $10.50 it begins to enter selling territory for an active trader. Play this right and you could realize a decent gain, and then add even more shares to your long term outlook.