Can Rotational Action Continue as Magnificent Seven Churn?
Fear is growing that Nvidia's upcoming earnings report could be a "sell the news" event.
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Jerome Powell’s dovish Jackson Hole speech triggered rotational action into the Russell 2000 ETF IWM and smaller stocks. That rotation continued on Monday morning, with the Russell adding another 0.7%, while the Nasdaq 100 QQQ is lagging with a loss of 0.3%. Chinese retailer PDD PDD is being clobbered for a loss of more than 25%, and that is impacting some other retailers and Chinese names.
The big question at this point is whether this rotational action can continue while the Magnificent Seven stocks are churning. There is some fear that Nvidia NVDA may be a "sell the news" earnings report later this week, but the key issue with this group is that valuation does not matter and, as interest rates drop, they can’t command the same high multiples they did when inflation was raging.
I’m pleased with recent small-cap action, but I’m playing tight defense, and I am not going to give back big gains. If you haven’t, read my recent column about why this tactic is so important.
I’m looking for strong charts and stocks with potential catalysts. One name that I like for some increased movement is Fulcrum Therapeutics FULC.
Fulcrum Therapeutics is a biopharmaceutical company that focuses on developing small molecules to treat rare diseases with unmet medical needs. The company has two main programs in clinical development. The first is Losmapimod, which treats facioscapulohumeral muscular dystrophy (FSHD), a rare disease that causes fat to build up in skeletal muscles, leading to muscular atrophy. This can cause patients to lose their ability to perform daily activities, experience chronic pain and lose mobility and independence. The second is Pociredir, which increases fetal hemoglobin expression and treats sickle cell disease (SCD) and other hemoglobinopathies.
What is most interesting about this stock is that it is set to release Phase 3 data for its REACH study of losmapimod in facioscapulohumeral muscular dystrophy in October. Dan Rosenblum of Sharkbiotech.com stated that he views this as the most exciting biotech catalyst for the rest of the year, but it is super high risk.
I am not interested in betting on the outcome of Phase 3 data, but rather, I am looking to trade the volatility, which should increase as the data release date approaches. The main issue in the Reach study is that Phase 2B did not show a reduction in DUX4-driven gene expression, which was the goal, but the drug was effective and may have a different mechanism for effectiveness than anticipated. This makes the Phase 3 outcome much more risky.
Analysts are quite optimistic about the stock. There are five buy ratings with an average price target of $17.75. Cantor gave the stock a price target of $23 on May 20, 2024.
The company entered into a collaboration and license agreement for the drug with Sanofi SNY on March 13, 2024, giving Sanofi the right to sell it outside the U.S. There was some concern that FULC did not get a strong deal, but it took place even after the Phase 2B deal, so there must be some level of confidence in Phase 3 results.
In addition, there was sizable insider buying near the recent highs.
Technically, the stock is in a trading range under key resistance at $10. I am looking for increased volume and movement in front of the data in October, but I have the stock on my books already as I watch for more volume and volatility.
At the time of publication, DePorre was long NVDA and FULC.
