Why IPO popularity matters to all investors

To start–please click this link if you would like to join in on a live webinar on May 12th at 7:00pm EST featuring superstar technical and seasonal expert Brooke Thackray. He is joined by that “other guy”, technical and contrarian investor – yours truly. You can join the webinar as a member of the CSTA (Canadian Society of Technical Analysts). As an aside, I would encourage all readers to join this organization for access to many educational events like this. Or you can participate in this event for the cost of $10 (roughly the cost of a burger, small fries and a coke and McDonalds). This seminar will not clog your arteries like the Mickey-D meal, and you may even get some good ideas to earn the $10 back in trading profits!

 

 

 

 

 

Keith Richards | Smart Money, Dumb Money

 

 

 

 

Also- before I forget- I post a new video every week, and I am offering content that is not presented on this blog or in the ValueTrend Update newsletter. The most recent video covers the ETF charts of some of the more widely traded international stock indices. My evil plot is to encourage readers of this blog to visit the video page (or subscribe) in order to get new ideas not presented in my other material. The recent video presents a few charts of some indices that appear to be breaking out for potential outperformance of NA indices. Here is the link to the video page.

OK, that stuff out of the way, lets talk about IPO’s. Initial Public Offerings, that is. In a recent blog, I posted a checklist of 5 factors that can help us identify the signs of a market in a bubble. Read that blog to see the list. Let’s go through some charts courtesy our friends over at Sentimentrader.com.

One of those 5 factors warning of a bubble is a rush of new IPO’s. As in…this kind of spike…

 

Should those IPO’s coming to market be more speculative issues with little in the way of proven earnings, this brings us further into the danger zone. As in…this kind of thing…80% of IPO’s are sporting negative earnings. Sweet! Gotta get me some of that action!

The market can continue on its merry, bubbly way, until the factors that were driving it to its bubble peak begin to dissipate. For example, what happens when the flow of IPO’s… slows (hey, that rhymes!). And… more importantly… how well are these IPO’s doing? Success breeds success when new companies debate whether to go public. They want to maximize the capital raised in their new issue…A hot IPO market encourages them to issue their stocks. So…How can we track the overall performance of IPO’s?

From ETF.com:

“IPO ETFs invest in the equity of companies that recently have had their initial public offerings. The first IPO ETF was the First Trust US IPO Index ETF (FPX), which was launched in 2006. Although these ETFs seek to capitalize on the growth and innovation of new companies, these ETFs do not offer access to pre-IPO equity.”

 

Sounds like a good source of tracking IPO’s might be to look at the charts of such ETF’s. One biggie in that space is the Renaissance IPO ETF. The chart is below.

“Hey, wait a minute”, you might ask…”Isn’t that chart showing signs of a topping formation? Did it just break its neckline? ”

Why yes, dear reader. You get a gold star on your report card for noticing that one. This chart looks like a topping pattern. Its a potential topping pattern that is occurring after an historic surge in IPO’s – 80% of which are showing negative earnings. Hmmmm…

 

Conclusion

SentimenTrader’s research suggests a 50/50 chance of positive returns on the SPX over the next month under the above conditions (well, actually, the recent surge in IPO’s is historically high..but lets just go with it). That 50/50 risk/reward potential is not a bearish bias (for those mathematically challenged).  But given the overbought markets of late …. see my recent blogs talking about the SPX’s  overbought status, aka the % over the 200 day moving average, the seasonal statistics (sell in May, go away), and the weak Bear-o-meter reading 

Perhaps the 50/50 risk/reward calculation by Sentimentrader might be tilting to the “risk” side more than their research suggests.

I’m just sayin’….

Don’t forget

  • Leave your comments below
  • Register for the webinar – ask a friend to lend you the $10 if you don’t have it. You’ll learn new strategies for todays overbought markets. Then you’ll be able to afford to pay your friend back!
  • Watch the video if you want some international investment idea’s.
  • Avoid artery-clogging foods

That’s it for now! Hope to hear from you during the webinar!

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