Sometimes, Stock Moves Can’t Be Explained Even When They Can Be Traded
Analysts often spend a great deal of time trying to explain why a stock price moved. At times, it seems as if they are making up stories. By paying attention to headlines, we can see that both rising and falling stock prices can be attributed to the same news story.
For example, when oil prices rise and stock prices rise, they claim oil is an indicator of economic activity. But, sometimes oil prices rise and stocks fall. On days like that, analysts might tell us that higher oil prices could decrease profits because companies will struggle to pass higher prices onto customers.
The underlying story is the same in both of these examples – oil prices are rising. But, the trend in stock prices is different on the two days. The logic to explain the move in stocks is then different on the two days. This demonstrates that the reason analysts give for moves in stock prices may not always be accurate.
The truth is, sometimes news does move stocks. This is often news that is directly related to the stock. That might be an earnings report or the rumor of an acquisition. But, sometimes, news fails to move a stock. This often happens when earnings are released and the market response appears to be a yawn.
How in the *[email protected]$ Did the CEO of a $3 Stock Do This??
He made a $450 million deal with Nokia... a $395 million deal with Microsoft... an $828 million deal with Cisco... and a $29.26 BILLION deal with Apple.
How did the CEO of a stock trading for just $3 do it? And just how high will the stock go as a result?
And, sometimes, a stock move is almost impossible to explain. An announcement that appears to be good news, for example, could coincide with a sell off in the stock.
Good News = Selling
That appears to be what happened to shares of Clovis Oncology, Inc. (NASDAQ: CLVS) on Monday.
The stock’s move even seemed to catch headline writers by surprise. A story at TheStreet.com was headlined, “Clovis Pops on Bristol-Myers Partnership.” Usually the word “popped” will carry a bullish connotation. But, the first line in the article made it clear the news was not bullish:
“Shares of Clovis Oncology Inc. were down 10% to $80.10 in early trading on Monday…”
The news certainly does seem as if it should be bullish. Clovis announced that they would be collaborating with Bristol-Myers Squibb Co. (NYSE: BMY) to evaluate the combination of Bristol-Myers’ s immunotherapy Opdivo and Clovis’ poly (ADP-ribose) polymerase (PARP) inhibitor Rubraca in Phase 3 studies in advanced ovarian cancer and advanced triple-negative breast cancers.
The collaboration will include a Phase 2 study of Opdivo in tandem with Rubraca in patients with metastatic castration-resistant prostate cancer.
Analysts issued research notes explaining their thoughts on the announcement. Leerink Partners told clients:
“We think this deal is positive, as it provides CLVS with access to one of the leading approved PD1 inhibitors and access to BMY’s clinical development infrastructure, while only incurring ~50% of the development cost. The [Bristol-Myers] deal also positions [Clovis] very competitively in breast cancer, in our view, which is clinically validated by [AstraZeneca plc’s (AZN) ] Olympiad trial result, but has been a more difficult indication for PARP inhibitors outside gBRAC+ patients.”
Earlier news related to Rubraca had been bullish for Clovis and that might indicate traders may believe good news is already priced into CLVS. In late June, the stock jumped almost 50% in one day on good news about Rubraca.
That gain in CLVS came after the company announced positive test results that indicated it could expand the use of its recently launched ovarian cancer drug.
Good News May Be Priced In
According to the company, the phase 3 study demonstrated that Rubraca improved progression-free survival for each of three patient populations studied, meeting primary and secondary endpoints in the 564-patient trial. Rubraca significantly outperformed a placebo for each group in the study.
Clovis plans to submit its data to the FDA within four months, aiming for an expansion of the prescribed use of Rubraca into second-line and later maintenance treatment for ovarian cancer patients. Currently, Rubraca is only approved to treat ovarian cancer patients who have the BRCA gene mutation and who’ve already had two or more chemotherapies.
Rubraca is also under review in Europe and Clovis is setting up an organization there to support a potential launch early next year.
This is one of the high priced cancer drugs that is under increasing scrutiny in the media and among politicians and regulators in Washington. When Rubraca was approved in December, Clovis announced a price of $6,870 for a 15-day supply, or $13,740 for a month.
Rubraca’s price is slightly above the price of competitive products from Tesaro and AstraZeneca. Prices for those drugs are $9,833 for a month and $12,450 per month. This means the test results are important because more effective treatment could increase the usage of the more important drug.
There has been more news from Clovis in the past few weeks. The company also recently announced that it would be selling $250 million worth of new stock to fund general corporate purposes. These expenses include additional testing on Rubraca along with spending to build a sales force for the drug.
What Comes Next?
As traders, it is important to consider what the flurry of news in the stock will mean going forward. To complete that analysis, it can be useful to look at a longer term chart of CLVS. The weekly chart is shown below.
Stochastics, a momentum indicator, is shown at the bottom of the chart. In an extended trend, stochastics tends to become overbought and remain at a relatively high level. Momentum seems to be weak on this recent up move and that is potentially bearish.
Monday’s decline pushed the stock to an important support level. CLVS is testing the gap created on the earlier news. This is important because a move back into the gap could prompt additional selling. This is because technical analysts believe a move into a gap is bearish and indicates the gap is likely to be filled. That would provide a price target of about $70 for CLVS, a significant down move.
However, there is also the possibility that traders who missed the initial move will find the current price level to be an attractive buying point. That would create support near the current price and prevent a large decline.
A Specific Trading Strategy
The highest probability trade for CLVS might be a bear call spread. This strategy generally profits if the stock price holds steady or declines. It is a strategy with limited risk and limited upside but a high probability of success. This strategy consists of selling one call option and buying a second call option to limit the risk.
The maximum amount of the gain is limited to the net premium received when the trade is opened. If the forecast is wrong and the stock rallies instead, the long call caps the amount of the loss. This is illustrated in the diagram below which is from The Options Industry Council web site.
For CLVS, we can sell a call with an exercise price of $95 that expires on August 18. This option is trading for about $2.80. To limit the risk, an option with the same expiration date and an exercise price of $100 could be bought. This option is trading at about $1.75.
Each contract covers 100 shares so the trade will generate immediate income of $105. The risk is limited to the difference in exercise prices less the premium received, or $395 for this trade. This provides a potential gain of 27% on the amount risked.
After two big moves, CLVS is likely to settle into a trading range. Momentum indicates the range could have a downward bias. To benefit from this, a bear call spread offers a high potential return on the amount risked.