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Written by and copyright © 2009-2010 by Thomas N. Bulkowski. All rights reserved.
In late 2009, many companies made common stock offerings at below market prices to shore up their balance sheets. In the case of banks, they issued stock to help repay TARP funds
or to shore up their capitalization. When a company issues stock to the public, the existing stock price tumbles.
I investigated whether there was a tradeable pattern associated
with those stock offerings. Those patterns I call event patterns because they are based on repeatable events that occur in the markets.
I collected as much data as I could find (using google), but that only resulted in 267 offerings, and most (89%) of them were from 2009. The oldest dates from January 2004. Only 21
appeared during the bear market of October 11, 2007 to March 6, 2009, as measured by the change in the S&P 500 index.
When a company announces the common stock offering, they typically tell you how many shares they will offer. The next day, they will price the stock and in 25% of the cases, they
will change the number of shares offered (usually increasing it, perhaps to compensate for the drop in share price).
For example, on March 30, 2009, American Electric Power (AEP) announced an offering of 50 million shares of stock. On April 1, they increased the offering to 60 million at 24.50 each,
both do not include possible additional shares sold to the underwriters in a 30-day option (9 million shares) to cover over allotments.
The day before the announcement, the stock closed at 26.27 and it dropped to a low of 24.81 on the announcement day before closing at 25.08.
These offerings are not private placements sold to hedge funds or institutional investors. I only counted public stock offerings. Sometimes the announcements appeared buried in SEC form 8-K,
but the news organizations often picked up on those.
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Common Stock Offerings
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Important Bull Market Results
Overall performance rank for up/down breakouts (1 is best): Not ranked
Break even failure rate for up/down breakouts: 10%/17%
Average rise/decline: 22%/12%
Throwback/Pullback rate: 60%/61%
Percentage meeting price target for up/down breakouts: 81%/76%
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Identification Guidelines
| Characteristic | Discussion |
| Price trend | Found in an upward price trend 55% of the time. |
| Announcement | The company announces an offering of common stock to the public. |
| Gap | Often the announcement is made when the market is closed. The next trading day, expect price to gap down 9% on average, measured from the prior day's close to today's low. |
| Downward breakout | A breakout occurs when price closes above the top (47% of the time) or below the bottom (53%) posted on the announcement day. |
Trading Tips
| Trading Tactic | Explanation |
| Drop | 74% of the time, price will drop up to 12% (evenly spread) the day the announcement hits the market. |
| Measure rule | Reference The Measure Rule figure to the right.
Using the announcement day, subtract the intraday low
(point B) from the high
(A) and multiply it by the above “percentage
meeting price target.” Add/subtract the result from the intraday high/low
(A/B) to get the associated price target
(C). |
| Confirmation | Wait for price to confirm the pattern. A breakout (confirmation) happens when price closes above the high or below the low posted
on the announcement day. Then trade in the direction of the breakout. |
| Up breakouts | The best performance comes after an upward breakout, especially if the preceding trend was downward (the offering acts as a reversal from down to up). |
| Yearly low | Patterns in the lowest third of the yearly price range show the best performance after an upward breakout. Downward breakouts do best anywhere except the highest third
of the yearly range. |
| Bottom | Price may bottom quickly. In 2 weeks or less, 65% bottom after a downward breakout and 50% bottom after an upward breakout. |
| Lower highs | Price often moves lower for a few days after the announcement. If you want to own the stock, placing a buy stop a penny above the high each day (trailing it lower)
until you are bought in will lower your cost of owning the stock. |
| Offer price | Comparing the close before the offer to the offering price, the discount ranges between 4% and 10% about evenly. |
| Low | After the announcement, price makes a U shaped turn, bottoming in a median of 4 calendar days or an average of 13 calendar days. |
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 The Measure Rule
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Example
The chart shows a picture of Ameren (AEE), on the daily chart.
Price trends upward as the green line shows. It peaks and slides down for a week or so before the company announces an offering of 19 million
shares of stock on September 8, 2009. The next day, they price the offering at 25.25, a discount of 6% below the close the day before the announcement.
As the chart shows, investors did not like the news of their positions becoming diluted by more shares. They sold the stock, pushing price lower.
After a few days, price began recovering, creating the typical J or U shaped move. I show that highlighted in the inset.
Price staged a downward breakout when it closed below the low on the announcement day. The down-sloping green line highlights the new price trend.
Notice both in this chart and the Measure Rule figure in Trading Tips (taken from an actual offering), that price after the announcement makes lower highs. Placing
a buy stop a penny above the high and lowering it as price drops will get you into the stock at a better price (I tested this). Of course, if price continues down, as in this example,
buying would be a mistake...
Other Examples
-- Thomas Bulkowski
Copyright © 2009-2010 by Thomas N. Bulkowski. All rights reserved. Honk if you hate bumper sticks that say "Honk if..."
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