So, I’ve been looking over today’s top movers…
Saw a couple names here and there… AVTE up ~70%, YOU up ~30%, LZ up ~35%, XMTR up ~65%, DDL up over 90% at one point, CPOP up 500% by midday, business as usual…
Wait, hold on, what? Multiple stocks up 30% to 500% in a matter of hours is no average day!
There’s more still: all of the above are IPOs!
That’s right, with the exception of DDL, which debuted yesterday (on June 29th), the rest of the names saw their first share to ever change hands just earlier today! How crazy is that?
Well, not overly crazy, to be honest with you…
See, there’s one thing you need to know about IPOs – much like many other areas of the market, they are highly cyclical.
When the general sentiment for the new issues is bearish, you may see flops from seemingly hottest companies in the best sectors.
But if the IPO market gets HOT… there’s no telling what it’s capable of!
If you’re looking to get involved, here’re a few thoughts to keep you safe and prepared:
Look, each company has a value and there’re plenty of analysts who’ll tell you what they think it is.
Same is true of IPOs – each of these companies gets studied at large, by some of the brightest brains on Wall Street…
But what good is their analysis when shares open at twice the price and still happily run higher?
The thing is, each IPO on its first day or few days (and even weeks, in some cases) has what traders call the “Price Discovery” phase.
See, public markets are different from private markets, and the value the former assign to companies may be very different from the best guesses of the latter.
As nobody really knows what that value will be, I’m against biased trading in the early days.
A stock may not be overpriced because it opened at twice the IPO price, and it’s not necessarily undervalued if it opened lower.
New issues are what traders call “trading vehicles” – simply tickers, that react to traders’ emotions and buy/sell orders.
Do “long traders” believe CPOP is worth 5 times its IPO price of $6?
I doubt it, but if based on that assumption you shorted at $15-$20, you’re in no good place.
If you saw momentum higher and scalped it on the long side – you’re much better off.
Sticking to your biased assessment of what the company is worth may do irreparable damage to your account, when dealing with IPOs.
Until things calm down, forget about value and trade the price action!
I talk about stock’s float a lot and IPOs won’t make me change the subject – in fact, it’s only more relevant.
Float is a key metric that in many ways pre-determines how stocks react to sudden jumps in demand or supply.
During the “Price Discovery”, active IPOs will involve a lot of emotions and overreactions – meaning continuous large scale shifts in supply and demand.
I’ve definitely noticed a tendency of smaller IPOs to be a lot more violent during the “Hot” cycle.
If you do decide to trade an IPO early-on – beware of that and always know what kind of a stock you’re trading.
And if it won’t give you much wiggle room…
Don’t Be Stubborn!
Hot IPOs may get irrational and we all remember: “the market can stay irrational longer than you can stay solvent.”
Being stubbornly stuck on one side of an irrational move is a recipe for a disaster.
Don’t ask for it – if the trade is obviously not working, don’t sit there and pray.
Get out, reconsider and get back in if a name gives you a good reason to.
This one is simple and generic, but your most important goal is to stay safe, as with all volatile trades.
I set aside an insignificant amount of capital I’m willing to bet on such a stock and I’m prepared to lose it – 1%, 2%, 5% of the account, the call is yours to make, but keep it small.
Even the most patient and thought-through trades in the “Price Discovery” phase have a gambling element – you never know what the crowd might decide to do next.
If stuff hits the fan – you can’t be bothered.