Did a Bear Raid Cause the Sell-Off in Arena Pharmaceuticals?
Friday morning, shares of Arena Pharmaceuticals (NASDAQ: ARNA) experienced significant volatility. The stock opened near $11.96, but fell quickly almost 35% to $7.80. After this quick sell-off, the shares rebounded back to the $10 level.
There was no specific news on Arena Pharmaceuticals Friday morning that would have caused such wide price swings. However, there has been some market chatter about a potential bear raid in the stock. A Bear raid is a trading strategy in which traders attempt to push a stock's price downward in order to cover a short position.
This strategy can be executed by spreading negative rumors or publishing a bearish report on the stock. Friday's Seeking Alpha article on Arena Pharmaceuticals supports the theory of a bear raid. However, it should be noted that stock price manipulation is one form of securities fraud.
The FDA will be voting on Arena Pharmaceuticals' weight-loss drug, Lorcaserin, on June 27. The potential bear raid might indicate that traders are expecting the drug to receive FDA approval, which would explain the aggressive short covering.
Including Friday's decline, shares of Arena Pharmaceuticals have risen more than 400% year-to-date. Despite this marked year-to-date rise, investors who believe that the potential bear raid indicates that Lorcaserin will get approved might still consider buying the stock on any pullbacks.
You can follow me on Twitter @TuomoKallio.
(c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.