Lumos Diagnostics (ASX: LDX) shares are down 50% from their peak. LDX shares have fallen really for no other reason than that they got much, much, too excited about the FDA approval of the diagnostic test. It is entirely true that without FDA approval you can do pretty much nothing in the American market. It's also true that the Americans can and will test for everything - thus FDA approval for a diagnostic test opens up one of the world's largest markets.
But the earlier reaction of Lumos shares to that news was, as we said, more than a little over enthusiastic. Our reasoning about Lumos: “On the other hand we can also consider this - the test is already authorised in a number of countries: “FebriDx is already registered in the UK, Europe, Canada, UAE, Brazil, Turkey, Pakistan, Singapore, Malaysia and Australia” In total that's rather larger than the US market. Even if we restrict ourselves to rich world the EU alone is about the same size (more people, less rich). So will sales boom in this new market?” So. while the FDA approval does open up that US market it's not wholly new news. The test is already approved and on sale in many other markets - FDA approval was one of those things we would expect to follow.
Lumos Diagnostics share price from ASX
We then went on to say about LDX: “Our opinion, and it is merely opinion, is that the Lumos Diagnostics share price has got a bit ahead of itself here. Yes, FDA authorisation does normally mean a great deal to a pharma or medical testing company. But it's also usually the first authorisation received. So we'd expect LDX to possibly fade a bit as this all gets digested by the market. Yes, FDA approval is important, but 500% important for something already on sale to potentially half a billion people? We're unsure about that.”
The Lumos price did go on ahead of the value at which we said that. But it's now near entirely back to the level at which we said that. And it's returned to that level in just the past two days - 50% off its peaks already.
The lesson from this is not only that we're prescient - not that we are, particularly. It's that we've been around stock markets for a long time. Small cap shares can and do wildly over react to news on the upside. Being in them before they do is lovely, of course it is. But chasing them higher on the back of news releases can be dangerous. Precisely because that original over reaction can end up reversing very swiftly indeed.
The other way of putting this is that momentum trades always do end and the difficulty is in knowing when they will.