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A Trader’s Guide to Secondary Offerings (Part 2)

A Trader’s Guide to Secondary Offerings (Part 2)

by MoleNovember 8, 2009

Michael Davey here…

Let’s get right to the point now and discuss the upcoming secondary offering for RINO (Rino International Corp).

I suspected early in the week when nobody guessed the name that I was holding a winner. Either that or nobody reads this schit. If you answered correctly and I missed it just let me know – your acryloplastic Ben Waflleck Click Clack balls be will ushered out immediately.

RINO remains a beast (thus far). Yes, it has been in consolidation mode for a few weeks, but such has been the nature of the market and the stock was severely extended on the upside. From the middle of July up until the negative key-reversal day October 14th, RINO was in a wicked, institutionally-charged advance; rising just under 200% in the last 3 months and nearly 900% in past 6 months (although it was barely trading and under $3 on the pink-sheets back at that point).

And institutionally charged is an interesting descriptor for a stock which has data showing sponsorship of only 1 mutual fund. The data is old, obviously (reported quarterly), since if you glance at the rising volume/price action, you have to be in the wrong career not to realize that professional fund managers had been getting involved with RINO in this period.

I’m willing to talk this trade, since assuming the trade sets-up (it may not), the strategy becomes very well-defined in terms of the entry and stop-loss benchmarks and it is only a matter of filling in the blanks to carry it out.

Hopefully not on a stretcher.

First though, we should be real for just a moment. I know this crowd is full of rabid-minded short sellers who’ve no respect for the fact that this year is the strongest bull market in 10 years (since it is all fake and going to implode any 5-minute bar from now). Fine, I’m not saying that’s not going to be the case and I love a good market to short as much as the next evil beartard. But for the sake of longevity I’m just as interested in where to fire long, in the event your counter-terroristic bull revamps still-higher, in spite of what any of us might think. There are drivers we’re not necessarily conscious of, but many of us insist on viewing the market according to our own two feet. As the market worked higher and yet higher, from the March lows, it was easier to accept if one measured the power of the market itself more than subjective views out of personal window boxes. The market advance may be a grand conspiracy, a simple but exceptional counter-move, or it may be that the growth is coming from beyond our visible horizon. No matter as far as a trader is concerned – the market itself is the key thermometer.

Oh yes, I’m getting right to the point. But I have to make sure enough of you cannot read down this far, so as to minimize the potential damage (since no matter how well I define the parameters for this trade, many will find a way to muck it up; hopefully that won’t be you or me. When RINO takes your face off, because you didn’t bother with the point about the stop-loss benchmark, or you waited for the stock to advance 50% before getting convinced enough to try it yourself, I will only seem more a fool once as it corrects in half).

I could go on about the story behind RINO. Forget it. The story of treating water in China is perhaps as big as networking in the early 90’s. But that doesn’t make RINO (or DGW, another Chinese water-treatment play) the next Cisco Systems, en route to a 10-year, 20,000% gain. RINO could go to zero and the story of this industry is still huge. Just as the Internet only got bigger even though so many dot.coms no longer exist. No reason to fall in love and marry a little growth stock. The story can go to hell.

To measure whether RINO becomes a powerhouse in this industry, means to continuously measure the stock. This is a very small-cap company at present, but growing at a very rapid rate – almost anything could happen.

You’re still reading this? Okay, safe to say it is just you and me now and so on to the point.

If we view the upcoming secondary price as our closing-price benchmark*, we will have defined what will be a modest loss (assuming it doesn’t gap to negative-infinity) and we will have the sky as our potential upside (I think a double into early 2010 is doable for a chart like this, assuming it makes a fresh, high-volume break-out from a 5 week+ consolidation and the market isn’t making you thugs rich again. A sooner break-out is not as likely to have as much boost, intermediate-term; though we’ll take it for whatever it’s worth; likely less though in that case).

I’m not going to tell you how to subscribe to RINO’s secondary (you might bag 100 shares if your broker likes you). My accounts hold a small percentage-allocation of the stock just now, but I am looking to get aggressively long RINO once the offer is priced, and my benchmark then becomes defined. Volume/liquidity will only improve after this 2ndary (and the fact that a $500M-cap issue already trades ~1M shares a day is a tremendous indication of potential). I’m risking a couple of points then (depending on how much I have to pay above the offer price) and I’m looking for 10 to 30 points of upside (no actual target, since I prefer instead to keep monitoring for strength, whether the market is helping-out or hindering along the way, etc.). RINO’s strength relative to the overall market is of course also very important.

Example: say they price it in the hole at 25.00 and the stock opens for trading next at 26.40. I begin working orders pre-market and then jam-in at market anything not complete (since this has the potential to rush-up strongly right from the open if the offer is oversubscribed; pent-up demand, which was awaiting the secondary, will affect the issue higher in that case and it wont be waiting for our kind to get comfortably aboard.

Volume will be very high on this day, which means I can unload a large position with relative ease and as such I will only buy more if it comes down towards the offer-price; getting as loaded as I can stand, buying as long as the price is above, but ending the session with zero shares should the stock close below the offer-price (on that day or any subsequent day for the intermediate-term).

If you’re looking to take on this trade, don’t do it because of me, but please re-read that last paragraph, as well as any or all disclaimer’s associated with Mole’s or my site. I will have no interest in the stock if trading below the offer and yet I have all the warranted interest in the world above that price – that is what makes this gamble attractive. My decision is only how much to weight, where to work into more, where to lighten, etc. I do not have to question if I am in the right place (since the offer-price defines it for me) and I can let it ride into a serious potential winner, while only risking a couple of points in the meantime (assuming again there is no dramatic gap-lower).

Once caveat. If the offer is very oversubscribed it will price in the hole (standard for a secondary) but it will gap-up strongly from the previous close in real trading (or sometimes gap-up a couple of percent and then rush-up to leave most of you in the dust. That is how the FUQI secondary went (study this one as a proxy for a secondary of a young, hot stock). FUQI was priced in the hole by more than 6% but the stock opened higher from the previous session’s close instead (opening up ~7.5% from the 21.50 secondary price and then simply ran even-higher from there. This is why I like getting to work in the pre-market and finishing my initial position by the first minute of normal-session trading.

For the time being I am still conveying trades via my Twitter page in (nearly) real time. Don’t do what I do, but you can see how it plays out live and maybe learn something.

Like how I touted an opp and took a fresh hole in my skull for it.

RINO is a young issue (as a Nasdaq stock at least) and management has an overwhelming percentage of the outstanding shares (72%). A more mature company is not going to jam elusively higher, typically, as trading commences on the day of a secondary, but all the rules and parameters apply there as well – it is just that the trading range, the risk and reward are all higher in a case such as this. I use these same rules for any interesting secondary I am attacking – the point being that my risk is clearly defined and I can therefore push aggressively as long as I am above the bench.

The most powerful group (that being the younger Chinese growth companies at this point) and then the most powerful names within the group interest me more than anything in a strong advance; at least unless Rome is burning. That’s where the safest-risk home-runs originate in my opinion.

RINO may have issues of quality, but at the moment it is the strongest chart within the strongest group. It’s worthy of following, if not more.

The upcoming offer-price is a gimmie benchmark to minimize possible risk, while the power of the rising tide on the chart illustrates the potential for greater reward. I do not know when this will price, but I would assume it to be any day now.

Ahead of such an offer, there is pent-up buying demand for such a stock, as institutions will prefer to see a pending secondary out of the way before committing aggressively to a stock. Unless you’re looking for a larger gamble, you should as well. They might have subscribed to the deal as well, which further checked any pre-offer appetite for the stock. Once the offer is out of the way however (and especially when their allotment turns out slimmer than they would have liked) pent-up buyers are unleashed to take on sellers in a now more-liquid issue. The offering price is the new standard at which the success of these buyers are defined, since everyone who participated in the offer is either under-water or above, depending on which direction the stock trades from that level. Buying an issue below the offer price means getting into bed with too many shares held at a loss. On the other side though, I know that demand is greater than (the now increased) supply, when the issue can rise above this new par.

Expect record volume for RINO the day of the secondary and a rising average volume for some number of days to follow. This is a small-cap stock, but liquidity will not be an issue. If I don’t appear excited about this set-up, I’m only holding back a bit of ink. I am monitoring news on the issue continuously, so as to be ready once the secondary prices; preparing to attack the set-up (or not) accordingly.

This and 6 cups of coffee daily is what I need to make the year.

* Closing-basis benchmark: I am not selling if the stock trades below the secondary offer price, but I am selling if it is to CLOSE below that level (more than 10 or 15 cents). If there is a clear and definite break of this level intraday (first a breach and then successive lower-lows), then I WILL sell sooner. Otherwise I am waiting until I can be sure the name will close below this benchmark.

Previously in this series:
A Trader’s Guide to Secondary Offerings (Part 1)
A Trader’s Guide (Introduction)
A Trader’s Guide to Chasing Ambulances
A Trader’s Guide to Exhaustion

About The Author
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.

  • http://oahutrading.blogspot.com/ steveo77

    Cent D, thanks for the market insights.

    Here is my take on ES


  • http://oahutrading.blogspot.com/ steveo77


    New Irreverent Poll Posted–have fun, it's Sunday!
    “What is your favorite source of News and Strategy Formation?”


  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    Nice post CD, and it might actualy work

    nevertheless it should work only as a v of 5 extension (and we're likely already doing v of 5)

    Better EWTers might correct me but neither 3 nor iii of 5 seem available to carry this explosively (other cases with other timings might have presented more interesting results)


  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    Mole, I know CD just posted a hard worked trade oportunity, and people should take some time reflecting on it, but… could we have a count an lines in the sand update before people try and get some rest before a new week?

    I personaly am still feeling evil (see new avatar) and remain zen until thursday, but others might be starting to get cold turkey from missing your daily shot of evil quatitative uneasing.

    best regards

  • MariAroma

    From Terry Laundry — “Update for Sunday November 8 2009. Today we update the forecast of a key low in the late November time period and our long term bullish outlook for Gold.” He expects a pop up Monday/Tuesday in equities (also a Bradley turn date, but unrelated to his work) then down to about end of November. Download two .pdf files and two MP3 files here —

  • http://centrifugaldeforest.blogspot.com/ Centrifugal_Deforest

    Are we talking about EW as far as RINO? Throw that out the window for such a small stock, imo.

    Also, explosive is if it makes a proper 5+ wk base and breaks out on major vol. Just a decent risk/reward trade until then, w loss nicely defined.

  • http://centrifugaldeforest.blogspot.com/ Centrifugal_Deforest

    Travel across the phuking planet and back wout a hitch – then miss a lousy commuter flight home.
    Sitting in Seatac airport now w my thumb up my ass

  • jacksoo

    feel for you CD – gave up that lifestyle a while back but have been in your shoes – nothing you can do now, just sit back, relax and wait it out.

  • http://centrifugaldeforest.blogspot.com/ Centrifugal_Deforest

    And no cobra blood here on the drink menu!

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    what I meant was your scenario could play parabolic on v of 5 BUT it seems to have finished (i) so… any drop entering (ii) might be the end (though it could be true(ii) if extended)… furthermore it risks being a fast parabolic,, climb, clim, climb… sudenly drop and you lost your sale.

    EWT should be applicable, and EWT likes 3's and fears 5's

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    “Sitting in Seatac airport now w my thumb up my ass”

    remind me not to shake hands with you when we meet… don't worry, won'T embarass you in front of others, will just say SWINE FLU PREVENTION

  • MariAroma

    This guys cycle chart shows up for Monday; down for Tuesday, Wednesday, Thursday; and back up to even Friday.

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    won't a bloody mary do the trick? spicy option, with a little thumb twist…

    p.s. just trying to make you laugh a bit as you are stranded in a desolate airport of a god forgoten city

    p.p.s. did my part on airport living, but luckily never got caught mid-trip

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    BTW EWT says, on individual stocks, trade only recognisable pattern.. august septembet looks like a nice triangle, so now 5 it is, and regardless of higher degree counts you'll revisit 12.50 (at least) when this baby falls

    good news, the november fall looks corrective so v of 5 is still in order (but careful about truncations…)

    this of course is just a simple rule of THUMB

  • http://centrifugaldeforest.blogspot.com/ Centrifugal_Deforest

    bloody mary – good idea. only 1hr more to go.
    …more desolate now than when i got here 😉

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    good luck and enjoy your drink

    p.s. have you noticed the triangle?

  • molecool

    I honestly do not feel very inspired to post today, especially after such a tepid response to Michael's excellent piece. I guess everyone has wandered off to the Slope or some other blog – there has been much activity this weekend. Had a lot on my plate this week and do not feel like sacrificing my Sunday again.

    I talked about this last week – this whole blogging business is a huge time sink for me and the rewards are meager. I cannot afford to keep devoting a huge amount of time here in the free section when I see for instance 1/3rd of all Geronimo subs discontinue after one bad week. Thus I told you guys that I will post here when I have time and I feel inspired – not because you guys expect a post every Sunday afternoon.

    Sorry if any of you feel let down – but the realities of this financial blogging business are catching up with me and I now understand why J.K. took a whole year off.

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    ok mole, care to take a look at the EWT angle on RINO? I gave my view but would love critics

    p.s. as i mentioned I can try keeping them here, but it's you who brings them here

    p.p.s. I'm very curious about next week, expecting spx:gold to re-dive under MA200

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    on the meager rewards, a hamsterful of them 🙂

    can't do more, but hope everything went well on your business trip and that you'll make a bundle (though I have a certain fear of starting businesses with 8 years of depression to come)

  • http://sshamster.blogspot.com/ Stainless_Steel_Hamster

    last but not the least, thanks for answering me so thorougly, and you must be very tired, hope you see this only when you wake.

    p.s. concerning geronimo it doesn't surprise me that it has had problems lately ( a system tunned to this rally must fail on inversion or significant change of base market conditions). but how's evil rat, and specialy resident evil, doing since september 20? I'd use it as an indicator of reversal….

  • ds2

    Hey Mole,
    I'm sorry you are feeling a little burned out. I actually have just been busy this weekend and not online much. CD's post is interesting to me but a date (actual or est.) for the secondary offering would have sucked me in more. If it was there – long post – I missed it.
    Berk's lunchtime lesson on Fri was GREAT for me. I totally got it AND it lined up w/ my own 4/10 ema crossover's that I came up w/ on my own. Nothing more assuring than finding something like that. Personally as someone fairly new to trading, I would really like to see more lessons along this line. Something I know little about is price targets for a trade. A lesson on that would be greatly appreciated. Berk, you listening?
    I fully understand that you have other things on your mind. Starting a new business is hard work. If you need some excellent hardware or software engineers, let me know. We laid off a bunch of really talented people and many are still looking for work, contracting or otherwise.
    I hope everyone has a profitable week. Let's bank some one way or the other.

  • http://retracementlevels.zstock7.com/ zstock
  • http://retracementlevels.zstock7.com/ zstock

    Hey Mole,
    Look at my site –I'm only posting 3 or 4 times a week, recently—It gets to me too!–
    after awhile though, I get going again, full throttle—
    The come and go wave has been like that for 6 years now.

  • molecool

    ¨°º¤ø„¸ N E W „ø¤º°¨
    ¸„ø¤º°¨ P O S T “°º¤ø„¸

  • tradejane

    Awesome post, Michael. I see I do myself a disservice by not paying close attention to NASDAQ stocks. 🙂

  • http://centrifugaldeforest.blogspot.com/ Centrifugal_Deforest

    FYI, date on secondary's are usually announced just before they price. It could be any day; will be clear before the open on that given day

  • ultra

    Excellent post, CD. Thanks for putting it together – there are so many different trade setups out there that it really is an education every day reading guys like you and Mole. Will watch this one with interest.

    Re. the applicability of EW to this thing – I would be wary – I mean you could call the recent high some kind of fifth, based on the RSI divergence (itself maybe reason for caution, MACD is more bullish), but then where are you really calling the start of the pattern from? It looks kinda patchy back there.


  • http://centrifugaldeforest.blogspot.com/ Centrifugal_Deforest

    It's a little weird looking back there, yes, but that was on the pink sheets.
    It moved to the naz in the spring this year and volume begins to come in soon after that (non-existent b4).

  • ds2

    Thanks CD

  • http://theperplexedinvestor.blogspot.com/ Leisa

    Did I mention that MD is a perspicacious observer of the market? I followed his link from his blog here.

    The realities of life are a bitch. Stiff upper lip, love.

  • http://centrifugaldeforest.blogspot.com/ Centrifugal_Deforest

    It's a little weird looking back there, yes, but that was on the pink sheets.
    It moved to the naz in the spring this year and volume begins to come in soon after that (non-existent b4).

  • ds2

    Thanks CD

  • http://theperplexedinvestor.blogspot.com/ Leisa

    Did I mention that MD is a perspicacious observer of the market? I followed his link from his blog here.

    The realities of life are a bitch. Stiff upper lip, love.

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  • http://www.level3securities.com investor relations

    Thanks CD that was a pretty cool report on secondaries.