Buyout rumor trading

Discussion in 'Strategy Development' started by oraclewizard77, Feb 10, 2010.

Buyout rumors are real or not?

Poll closed Feb 20, 2010.
  1. Hedge fund running pump and dump.

    0 vote(s)
  2. A reporter gets a real story.

    2 vote(s)
  3. None of the above

    1 vote(s)
  1. oraclewizard77

    oraclewizard77 Moderator

    Rumor of buyout is started by hedge fund which is pumping and then dumping a stock or real?
  2. oraclewizard77

    oraclewizard77 Moderator

    I want to give an example of trading that happened recently in a stock with a buyout rumor. We will look at NWCI.ob and volume.

    Date Open High Low Close Volume Adj Close*
    10-Feb-10 1.56 1.63 1.56 1.60 134,600 1.60
    9-Feb-10 1.58 1.61 1.56 1.57 187,200 1.57
    8-Feb-10 1.67 1.80 1.49 1.58 165,100 1.58
    5-Feb-10 1.64 1.68 1.60 1.66 140,200 1.66
    4-Feb-10 1.62 1.65 1.50 1.63 348,100 1.63
    3-Feb-10 1.42 1.68 1.40 1.64 908,600 1.64
    2-Feb-10 1.43 1.45 1.38 1.40 178,100 1.40
    1-Feb-10 1.47 1.49 1.35 1.43 357,500 1.43
    29-Jan-10 1.31 1.50 1.31 1.45 360,200 1.45
    28-Jan-10 1.49 1.49 1.32 1.38 252,000 1.38
    27-Jan-10 1.60 1.60 1.45 1.45 290,100 1.45
    26-Jan-10 1.74 1.75 1.55 1.57 246,200 1.57
    25-Jan-10 1.53 1.79 1.50 1.72 473,200 1.72
    22-Jan-10 1.47 1.50 1.41 1.48 203,500 1.48
    21-Jan-10 1.61 1.64 1.32 1.45 650,800 1.45
    20-Jan-10 1.84 1.86 1.55 1.56 656,500 1.56
    19-Jan-10 2.05 2.17 1.75 1.85 1,250,900 1.85
    15-Jan-10 1.78 1.98 1.63 1.88 2,217,000 1.88
    14-Jan-10 1.20 1.85 1.19 1.53 997,100 1.53
    13-Jan-10 1.03 1.25 1.01 1.10 426,000 1.10
    12-Jan-10 1.05 1.05 0.87 1.00 212,100 1.00
    11-Jan-10 0.90 1.00 0.90 0.95 14,200 0.95
  3. oraclewizard77

    oraclewizard77 Moderator

    Below is the date and story of the buyout rumor and also syncs to the day with the biggest volume of shares traded for the stock.

    Friday, January 15, 2010
    "Buyout in the Works" After NWCI is Awarded Key Patent

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    Jan 15, 2010 (BAYSTREET NEWSWIRE via COMTEX) ----The same biotech news portal that reported RXI Pharmaceuticals' (Nasdaq:RXII) now confirmed partnership talks weeks ahead of time is now reporting that another buyout in the sector may be in the works at this moment.

    Their report comes on the heels of Thursday morning's key patent news announcement for small cap innovator, NewCardio (NWCI.OB).

    According to BioMedReports, the Silicon Valley based company with a very small share float became the subject of some "credible buyout rumors" on the last day of the recent healthcare conferences in San Francisco.

    "Rumors began to fly that the company was suddenly in deep negotiations regarding a buy out," reports M.E. Garza. "After chasing the story, and seeing a key patent announcement hit the news wires on Thursday morning, its my opinion that if the buyout occurs, it will could send shares of NewCardio somewhere between $10 and $14." According to Garza, the company has a hot new technology that is shaping up to be not only the next great diagnostics tool in cardiovascular medicine, but could also turn into "the ultimate medical phone app." There is talk about a hardware/software combo that would allow anyone to hold a smart phone-like device up to their chest in order to interpret/communicate the readings directly to a doctor.
  4. oraclewizard77

    oraclewizard77 Moderator

    As you can see, 2 days before the story came out, there was large and unusual volume of shares being traded for the stock. Maybe this is the hedge fund getting positioned for when its story is going to come out.

    And when the story comes out, we see the stock spike up, which is then probably sold by those that bought the days before.

    For a retail trader, we can see some possibilities of how we may be able to make money even without knowing before hand that the story is coming out.

    1) We could go short on the day of the story and/or the 2nd day and start scaling out as the price goes down with no actual buyout pr coming out.

    2) We could go long for example today, after the price has settled back down to a more normal trading range assuming we like the stock or by getting a price that is better for the actual buyout or other positive news being discussed by the company.

    3) If the stock has options, it would help to also look at the option action since it would tell us how larger traders are positioning their funds.

    As a followup on this stock, the reporter claims he owns shares and has not sold yet indicating his belief in good news to still come.
  5. I think I've seen something similar to this when I was trying to find a volume/price relationship. I wasn't able to apply it across all US equities that I could touch so I have had to shelve it.

    For the situation you show, I can't imagine a hedge fund going through all that trouble. The first day you list, only 14.5k shares were traded, closing at less than a dollar. If those 14.5k shares were bought or sold by a single entity, it would have been less than $15,000 of their portfolio. Similarly over the lead up to the transaction there isn't that much volume and price with which to work. I can't imagine an establishment fabricating a rumor just for that.

    If previously that stock was traded aggressively, then maybe somebody does own some baggage and they're trying to dump it at a decent price. Maybe you need to show more data in the leadup.

    That being said, it doesn't mean there isn't something malicious going on. Some small fry could be running a pump and dump scam and tried set that up as the super hot buy stock in their random emails and FAXs to whatever empty hole there is on the planet.

    I had wondered if somebody could basically front run pump and dump scams by getting in and out early on but I imagine that's risky, and still not the kind of strategy you want to try to explain to the FTC.