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Forget the Bear: Profit from the Lockout Cycle

Posted January 21, 2016

I'm here to tell you a secret of the IPO market.

An IPO is an initial public offering. It is when a new company goes public and you can buy and sell it.

2014 was a huge IPO year — the biggest on record — with more than 250 companies going public.

Due to volatility, 2015 was a bit more average but still solid, with 169 IPOs. Companies like Alibaba (NYSE: BABA), which raised $21.8 billion, went public.

Companies like Shake Shack Inc. (NYSE: SHAK) and GoDaddy (NYSE: GDDY) are up 53% and 46%, respectively.

Buying a newly listed company can be a good idea. After all, the company is new, with a solid management, and it will have a ton of cash. The possibility of a massive gainer like Netflix (NASDAQ: NFLX) or Facebook (NASDAQ: FB) is real.

That said, you don't want to be a sucker and buy the hype on day one. You should buy at the six-month mark after the lockout cycle ends.

Hear me out...

How Lockout Cycles Work

Here is the deal: When a company goes through an initial public offering (IPO), it is required by the Securities and Exchange Commission (SEC) to adhere to certain regulations.

One of these is that insiders can't sell all of their stock on day one of trading. That would be a clear pump-and-dump.  

Instead, the SEC dictates that insiders must wait six months before they can start to sell. Nor can they promote the stock within certain parameters. There is a quiet period.

The Hype

So you traditionally have an IPO trading action where the share price is hyped to high heaven from about a month before the launch. On the day of the launch, the CEO rings the bell on the trading floor.

The talking heads on MSNBC, Fox, and Bloomberg talk the stock up. If it's a big IPO, it might lead the evening news.

The public starts to buy shares. Traders want to flip the first day.

Then after about a month or three, the stock price starts to drop. People realize that the company will increase the amount of stock — sometimes by a great deal — at the six-month mark.

More shares outstanding plus the same number of buyers means that the stock will go down.

But here is the catch: The six-month point is the unlock day. It is well known to anyone who owns the stock, as well as the market in general.

Forward Looking

Therefore, because the market is always looking forward by at least three months, the stock starts to sell off. Within a few weeks of the unlock date — if not on the day itself — the stock hits bottom.

Now the insiders can talk about the stock. And they do. They say how great everything is going and how wonderful next earnings will be. Furthermore, because they aren’t idiots, and Morgan Stanley or whoever took them public knows the game, they don't dump all of their stock as soon as they can.  

They wait and talk some more. Maybe even tell their accountants to put out a solid earnings number. And sure enough, within 90 days, the stock is back up. Sometimes it is up a great deal.

Calendar Profits

All you have to do to make money on this phenomenon is look at your calendar. Find a stock, and match it to a technical bottom formation.

Then you buy call options — a bet the stock will go up. You get these cheap because the stock is currently going down.

You sit tight for a bit and then sell when there is a clear topping formation or you've made the money you are happy with.

If this simple plan makes sense to you, I would encourage you to watch this presentation on how to leverage this IPO lockout system. Over the past two years, I've highlighted 192 different gains, with winners ranging as high as 187%...

And ALL of them occurred within 90-day timeframes.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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