FDA gives Sorrento Therapeutics the green light to begin Phase I COVID-19 trials – Should you short?

Sorrento Therapeutics (NASDAQ: SRNE) is putting on a volatility show this week. The bulls were leading the charge at the start of the week but took a big rest on Wednesday, which saw SRNE pullback by 12%. All bullish hope seemed lost. However, today the FDA gave Sorrento the green light to begin phase I COVID-19 trials. To say that the announcement was a super magnet for bullish investors would be an understatement. Many investors are now torn between shorting the optimistic jump or riding the wave. Thus, today’s article will breakdown the FDA news and deconstruct the short/long argument.

Table of contents 
1. Why all the hype? 
2. Is the Sorrento Therapeutics FDA news worth shorting?

Why are investors rallying behind the Sorrento Therapeutics FDA news?

Sorrento Therapeutics enormous 55% rally is because of three reasons. First, the pullback on Wednesday alerted many technical investors to jump in and for the longs to top up on their positions.

Second is the bullish reaction to today’s COVID-19 catalyst. The FDA permitted Sorrento to begin enrolling hospitalised patients for its Phase I COVID-19 trial. Phase I is usually not that noteworthy as it aims to test the drug safety’s and is a relatively easy hurdle to overcome. However, considering the trial relates to COVID-19, Phase I is significant. Hence, the volcanic volume in pre-marketing trading.

The future of Sorrento

Lastly, investors bought shares because today’s announcement symbolises a beacon of bullish hope. “The initial trial is expected to be followed by large trials targeting a potential Emergency Use Authorisation (EUA) submission as early as before the end of this year.” If the FDA were to grant Sorrento a EUA, STI-1449 would be fast tracked through the clinical timeline. In which the speculation surrounding Sorrento would become extremely bullish.

Moreover, Sorrento’s COVID-19 vaccine candidate holds impressive pre-clinical trial data (opinion not advice). For example, in the in vitro study, “STI-1499 demonstrated 100% in vitro neutralising effect against SARS-CoV-2”, ultimately preventing the infection of healthy cells. While past performance is not an indicator of future performance, investors may use pre-clinical data to predict potential Phase I outcomes. To add the cherry on top, a phase one announcement of this calibre often increases media coverage and, future volume. Therefore, the bullish future might have enticed investors to jump in before all the eyeballs come swarming over.

Sorrento Therapeutics FDA news – all hype or a real catalyst?

Before I begin, I am obliged to remind our viewers that this is not financial advice but rather investment commentary from extensive research

Short answer: Sorrento is likely to suffer a sell-off in the short-term (opinion not advice) 

Some investors see COVID-19 Phase I and are sold on the idea of buying shares. The Sorrento Therapeutics FDA news is a real catalyst that should lay the foundation for a bullish undertone. (opinion not advice) Because humans are wishful thinkers, and thus, investors will expect positive Phase I trial results. However, it is always important to remember you are buying shares off somebody else. So if they are willing to sell you their shares, you must ask why? In the case of Sorrento, investors might look to sell shares for two reasons. One, to take profit. The other likely reason is that a fall in SRNE activated investors stop losses. Both possible reasons should signal red flags. Because profit- taking implies the music is starting to slow down, and stop losses could mean the party could be over.

COVID-19 deception theory

The common theme of COVID-19 stocks rising on FDA news only to fall the following day is all too familiar. The COVID-19 deception theory is suggesting a SRNE pullback is likely. Thus, it is important to be impartial and not base your investment off phrases such as “but this COVID-19 stock is the exception”.

Overall, the move for the week is favouring the bullish side. Ultimately, signalling possible growth as time goes on (opinion not advice). However, the recent growth is likely unsustainable as it is difficult to top an FDA announcement. Hence a short term sell-off is likely.

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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

Written by Patrick McLoughlin, Senior Manager of YIG.

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