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"Thy drugs are quick. Thus with a kiss I die."

-Shakepeare

The Biotechnology and Drugs sector is full of catalysts, rumors, and speculation. Stocks will surge and collapse on little or no verifiable news, and while a surprise rally can be an indication of something good happening beneath the surface, it is just as often a good chance to sell the stock.

A couple of weeks ago I reccomended Ibio (NYSEAMEX:IBIO) and took a screen shot of the little "A" flag showing my recommendation hours before it surged:

(click to enlarge, all charts from Google Finance)

Hey, what a thrill! And the surge continued:

(click to enlarge)

The only problem was that there was no real news at the company to justify such a surge. It seemed based on discovery and excitement more than any business catalyst. And that was a problem:

(click to enlarge)

In the space of a couple weeks the stock shot from the $.90s all the way up to $1.50, but if you didn't sell, you watched it drop all the way back to $1. In fairness the stock has recovered today:

(click to enlarge)

Dramatically quick drops in share price that seem unrelated to underlying business news generally come in three flavors:

  • Profit Taking
  • Bear Raids
  • Tree Shaking

Profit Taking

Profit taking is part of any bull run. When a stock surges, some shareholders will take their money and run.

Ibio surged before it took a breather so that looks like some profit taking. Likewise for Pluristem (NASDAQ:PSTI):

(click to enlarge)

Sell-offs in Cornerstone Therapeutics (NASDAQ:CRTX), Savient Pharmaceuticals (NASDAQ:SVNT), Arena Pharmaceuticals (NASDAQ:ARNA), Amarin Corporation plc (NASDAQ:AMRN), and Questcor Pharmaceuticals (NASDAQ:QCOR) look like profit taking too as all of those stocks had run up significantly before last week's harsh drubbing.

Bear Raids and Shaking the Tree

Bear raids are different. This is stock manipulation with the goal of profiting from the decline. Firms will sell stock short directly driving down the share price. Rumors of business problems are floated, people start saying things like "the chart has gone bad." Shareholders get scared and sell and the rout is on, feeding upon itself until value investors step in and give the stock a floor.

Tree shaking is bear raiding with the goal of buying low. Suppose a firm is in love with a particular stock, and they are going to take down a big chunk. It is in their best interest to tell the world what a great stock this is before they move in, right? Of course not. That might drive the price up before they buy. They will stay tight-lipped, or sometimes they will use the bear raiding techniques of creating fear to drive the share price down in shock-and-awe "how much worse is this going to get I better sell right now" scare sessions. Then, in the volume of the sell-off, and at discount prices, the firm will buy their shares. They "shake the tree" to see who will capitulate and sell them their shares.

Given the surge in Biosante (NASDAQ:BPAX) on little news today, last weeks collapse looks like some tree shaking:

(click to enlarge)

A look a little further back in time reveals that the tree shaking in this case may have been to set up a short-covering session as that is a huge move on heavy volume, and BPAX had 3.5 million shares sold short.

(click to enlarge)

Likewise with Pain Therapeutics (NASDAQ:PTIE), Reliv International (NASDAQ:RELV), and OXiGENE (NASDAQ:OXGN). All of these stocks surged big today after long declines culminating in last week's big losses:

(click to enlarge)

Contrast that with the surges in Optimer Pharmaceuticals, (NASDAQ:OPTR), Endocyte (NASDAQ:ECYT), Oncothyreon (NASDAQ:ONTY), Compugen (NASDAQ:CGEN). Last week's beating may have been some clever folks getting ready to take their positions today:

(click to enlarge)

Conclusion

Not all sell-offs are created equally. It is scary to watch your positions get run over, but don't forget that firms are sometimes counting on that fear to get shareholders to sell their shares.

What to do? Stay focused on the underlying business of a stock. If a position you have sells off, and you are convinced that the move had nothing to do with the underlying business it is very often a gift of a buying opportunity. Likewise when your stock surges and the business has not changed, it could be a gift of a selling opportunity.

It is not always a good idea to sell strength and buy weakness, but if the move was independent of the business, it is often a good time to "buy the dips and sell the rips."

Source: Bear Raids And Tree Shaking In Biotechnology And Drugs