Part 4: Influential Stock Market Trends

Provided By Ultimate Trading Systems

The Different Kinds Of Market Trends That Can Influence Your Trading

IPO Lockup Expirations & Stock Market Trends
Another in the long list of stock market trends to play is to short stocks with upcoming IPO lockup expirations. An IPO lockup is a period of time, usually from six to eighteen months, when insiders who obtained the IPO at the offering price or less cannot sell their shares.

Once this time period has elapsed, insiders often sell their shares. These stock market trends are shortable because the greater the number of shares unlocked, the more likely it is that insiders will start to sell their shares, particularly if the market is not doing well but the share price is still higher than the IPO offering price. (The more shares freed, the better the chance of a negative effect on the share price.)

This trade works best when the number of shares being unlocked is more than 25% of the current market capitalization. You should short the stock roughly ten days before the IPO lockup expiration date, since anticipation of the event usually scares traders out of the stock well before its actual date. Cover the short about five days after the expiration date. By that time, most insiders will seem to have sold, and the news will be priced into the stock.

Index Additions & Stock Market Trends
Mutual funds that track major stock indexes have to buy any new stock added to an index in order to keep pace and follow its investment guidelines. The larger the market capitalization of the company added to the index, the more shares the funds need to buy. The increased buying pressure on stocks added to indexes and stock market trends have a tendency to drive their prices up, and this trend creates a great trading opportunity.

The stock may or may not begin to move on the day the index addition is announced, but it generally starts to move up in earnest one to two weeks before the addition actually takes place. Once the stock enters the index, its price tends to fall as traders take profits — as they sell the news. It can fall for several days after it's been added to the index.

These stock market trends can be traded long on the way up, until the day the stock is added to the index, and short on the way down, once it's been added.

“Window Dressing” & Stock Market Trends
At the end of each quarter, mutual funds try to dress up their portfolios by buying the stocks that have had the best performance during that quarter, as if they had followed the proper stock market trends. They do this to mislead potential investors into thinking that the fund's managers are great stock pickers.

It's possible to make money on these stock market trends by buying shares of high performing stocks just before the end of the quarter to catch the price rise when funds start buying large quantities. The flip side of window dressing is that funds often dump their poor performing stocks - stocks in any group that's under performed during the quarter - right before the quarter ends. You can try picking up stocks in under performing sectors at the end of the quarter, because they'll often be picked up again during the next quarter by the same funds that just dumped them.

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