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Category: Chart of the Week

Appetite for IPOs is a Fascinating Study in Sentiment.

The appetite for IPOs is a fascinating study in sentiment. In all the market changes over the decades, that has been one constant.
Three years ago, we saw that sentiment was so skittish that it had been months since an IPO had priced above its indicated range. By October 2018, not only had the market thawed, but investors were more than willing to buy into new issues that had no record at earning money.
In the coming months, if the market holds somewhat together, we’re likely to set all kinds of records for IPOs. None of them are good longer-term signs for stocks.
On a rolling 36-month basis, we’re already seeing a near-record of billion-dollar IPOs. The only two times that (barely) eclipsed the current streak were in the fall of 2000 and spring of 2015.

The appetite for IPOs is a fascinating study in sentiment
The appetite for IPOs is a fascinating study in sentiment.

Thursday’s reception to Beyond Meat, giving a multi-billion-dollar valuation with a rousing first-day reception to a company that barely makes money and is trading at more than 40 times revenue, should be a sign that we’re not in 2016 anymore. ( This study was created by www.SentimenTrader.com ).

S&P 500 Bullish Percent Index Signaling Market is Overbought

There’s obviously no sure-fire way of determining when the stock market has bottomed, and it is time to buy. Or, for that matter, when it is near a top and it is time to head for the sidelines. However, the S&P 500 Bullish Percent Index is regarded by market professionals as a tool that historically has proven to be helpful as a contrarian indicator of when the market is getting overbought or oversold. The Investors Intelligence point and figure chart below shows that 77% of the stocks in the S&P 500 when given equal weight are showing buy signals. Anything over 70% historically means the market is overbought and ripe for a downturn. Contrast that to last December when the index was showing the great majority of stocks with sell signals, and only 18% with buy signals. When fewer than 30% of the stocks are showing buy signals that historically means the market is becoming oversold and ripe for a turnaround.

S&P 500 Bullish Percent Index Signaling Market is Overbought
S&P 500 Bullish Percent Index Signaling Market is Overbought

Stock Market Risk Grows with Explosion of Negative-Earning IPOs

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.

Stock Market Risk Grows with Explosion of Negative-Earning IPOs
Stock Market Risk Grows with Explosion of Negative-Earning IPOs

IMF Cut in Global Growth Rate is Another Warning for Stock Market

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.

IMF Cut in Global Growth Rate is Another Warning for Stock Market
IMF Cut in Global Growth Rate is Another Warning for Stock Market

Large IPOs and Record IPO Calendars Can be Warning Signs of Rough Times Ahead for Stock Market

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.

Large IPOs and Record IPO Calendars Can be Warning Signs of Rough Times Ahead for Stock Market
Large IPOs and Record IPO Calendars Can be Warning Signs of Rough Times Ahead for Stock Market

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