One of the greatest advantages each trader on our desk has is being able to listen to the exchange of ideas from our AM Meeting. At the beginning of each meeting Dov gives the Big Picture, which is an overview of world markets and both macro and micro events that may create intraday trading opportunities for our desk.
After Dov completes the Big Picture I’ll outline the theme for a particular trading day. Today I spoke about oil possibly having put in a short term bottom and that some of the energy names might be in play. We specifically focused on HK which priced a secondary at $26.53. HK is one of several energy companies that recently sold stock in the marketplace to raise capital. The other two were CHK and XTO. Both stocks dropped below their offering prices and had significant intraday downmoves. I remarked to our traders that this secondary was going to be the one that would break this pattern and most likely would not drop below $26.53. My reasoning was related to the fact that HK had pulled back around 50% in the past six weeks and therefore was able to price the deal at a level that it could easily be defended. Our Head Trader, Gilbert Mendez, remarked that it was “the buy of the century” if we could get it at that price and might trade as high as $29 (for the record, HK’s intraday high was $28.90) (I’ve contacted our tech guy to post the audio from the meeting ASAP).
After the AM Meeting ended I went to my trading station and entered price alerts into my platform based on the stocks that were discussed in the meeting. I set an alert for HK at 26.60. At 9:46AM my alert popped up and so I started to watch HK. I bought 1,000 shares at 26.53. HK never traded below 26.53. In fact, within 5 minutes I was able to sell a portion of my position at 26.94. I was holding the majority of my position for a more significant upmove.
Now that was easy money! Remember, stocks will make significant intraday moves off of the level that they price their secondary offerings. This will happen for one of two reasons. There will be a bounce because the underwriters will attempt to defend the level where they just priced a large amount of stock. Why? Important for their reputation and gaining future business. Two, if the stock drops below the secondary price then there will be panic from both new investors who don’t want to suffer losses on the stock they just bought, and previous investors who don’t want to get caught in the downmove created by the new investors.