Why Insys Therapeutics Inc Is Up Double Digits for the Second Straight Day

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What happened

Insys Therapeutics (NASDAQ: INSY) is up 16.2% at 1:37 p.m. EST Wednesday after rising almost 20% Tuesday on no apparent news.

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So what

Yesterday, fellow Fool Sean Williams suggested the move could be coming from a post-Christmas decision from the FDA to grant fast track designation to Insys' oral cannabidiol (CBD)-based solution. He also suggested that a short squeeze could be the cause. Going on our second day of double-digit increases, the latter seems much more likely.

Fast track designation isn't worth very much to the company and is mostly based on the disease the drug treats -- for Insys' CBD that's Prader-Willi syndrome, a genetic disease that leads to an insatiable appetite and doesn't have any approved treatments. Unlike the FDA's breakthrough therapy designation, fast track designation doesn't really take into account whether the FDA thinks the drug will work. Considering Insys' CBD is still in preclinical development, it really isn't possible for the FDA or investors to evaluate its true potential yet.

A short squeeze is caused by short investors having to buy shares to close their positions and return the shares that they borrowed and sold to open the position. If there are more people interested in buying than selling, the price goes up until sellers are willing to part with their shares. And as the price goes up, short sellers lose money, causing more of them to want to end their position. With 10.17 million shares sold short as of the middle of December and shares having doubled since then, there are plenty of short sellers that could be looking to close their positions.

Now what

Short squeezes determine the short-term valuation of a company based on the current bulls and bears, but the pop is often short lived as equilibrium is eventually reached and the valuation returns to its intrinsic value.

Of course, there could be more to the move than the fast track designation or a short squeeze -- perhaps Insys is in talks to be acquired or there are just rumors of such -- but without anything to go on, buying now is closer to gambling than it is to investing.

Long-term investors looking for a tangible investment thesis should check out Insys Therapeutics' presentation at the J.P. Morgan Healthcare Conference next week.

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Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.