Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.
As the chart from Topdown Charts shows about 76% of recent IPOs have gone public with negative earnings. That’s a near record, matching 1999 and only surpassed by 2000 when the dot.com bubble burst. Why is this an ominous sign? Historically the percentage of risky IPOs increases dramatically near market tops. That’s because investors have become overly optimistic and are willing to make increasingly speculative bets. And that also spells opportunity for venture capitalists and bankers to sell and profit from increasingly risky IPOs as long as investors are willing to place their bets.
We use investor sentiment as contrarian indicators on market direction since investors are usually wrong. During the past week the indicators were showing increasing investor optimism for the near term and the intermediate term. And that’s a warning signal for smart investors to watch out.
Short term sentiment indicators have now started to issue negative warning signals as investor complacency grows. The VXXB is now at a two-year low showing no sign that the market place is expecting future volatility. The CNN Fear Greed Index is trending higher in the greedy zone at 68.
Intermediate term sentiment has also moved to the negative side as contrarian indicators. The Smart Money/Dumb Money confidence gauge has moved to multi year lows showing that most of the marketplace is now getting bullish. The Investors Intelligence Bulls/Bears poll of stock market newsletter writers shows bulls at 54% bulls and 19% bears. This makes the spread positive 35% which is optimistic and a negative. Plus 40% is a red alert warning sign, and we have been grinding our way toward that.
The International Monetary Fund just cut its projection for 2019’s global growth to 3.3 percent from its January forecast of 3.5 percent. That would be the lowest growth rate since the financial crisis in 2009 when the global economy shrank (see chart below). The cause? Worsening outlook for most major economies and higher tariffs decreasing trade. We believe the IMF’s projections are another warning sign for a stock market break this year. It is in line with the fact that stock market analysts have been steadily lowering forecasts for public company 2019 earnings.
We use investor sentiment indicators as contrarian indicators on stock market direction because investors are historically wrong. The CNN Fear & Greed Index has moved up to 70, showing short-term sentiment has gotten bullish, a negative sign for the stock market. Meanwhile, the VIX volatility Index is as low as it was before last year’s 4th quarter selloff.
Intermediate sentiment also has become more optimistic. The Investors Intelligence Bulls/Bears poll of newsletter market writers is 54% bullish and 19% bearish. That’s a spread of 35% between the two, which is another warning sign.
Large IPOs typically occur during times when stocks are fashionable to own. Large IPO’s with large one day pops are synonymous with a high-risk stock market environment fueled by overly optimistic investors. The chart below from www.sentimentrader.com shows big market drops after 2000 and 2007 and flat performance following 2014 after big IPOs had big first-day jumps Lyft’s recent $2.2 billion offering qualified in size but not in terms of first-day performance. On the other hand Lyft had no trouble raising a huge $2.2 billion from investors who ignored the fact that it went public with the largest EBIDTA loss for any IPO ever. It also should be noted that record IPO calendars also can be a sign of too much market exuberance. Renaissance Capital projects 2019 will have a huge IPO calendar amounting to over $100-plus billion. That’s similar to previous record years of 2000, 2007 and 2014. And we already have discussed what happened back then.