The Robinhood IPO was a big event. It was the hottest Initial Public Offering (IPO) for some time. Today I want to discuss the sympathy trade. You see, whenever there is an IPO in a hot new sector, other stocks in that same sector can move with it in sympathy.

For this reason, it is vital to do your homework not only about the company that is listed but also on other potential businesses in the sector. This hard work can set up some excellent trading opportunities. I’ll discuss the trade I made in FTCV, a SPAC merging with EToro, another online broker.

Robinhood Markets Inc, (HOOD) operates a financial services platform in the United States. Its platform allows users to invest in stocks, exchange-traded funds (ETFs), options, gold, and cryptocurrencies. It was one of the first brokers in the world to offer commission-free trading for retail clients.

It emerged at the center of the MEME stock controversy last year. Clients were frozen out of buying stock in GME and AMC as margin requirements put stress on brokers and other financial market intermediaries (Interactive Brokers also had problems). Coming into the IPO, it was priced at a lofty $38 billion valuation due to its significant revenue growth over the past year as more and more customers entered the public markets.

I myself was bearish on the IPO due to the high valuation and significant distribution of stock to retail investors. The best IPOs are usually very hard to get in on, with stock allocations going to only the wealthiest and biggest clients of Investment Banks.  So, when practically any retail investor can get allocated stock, this makes me skeptical that the IPO can be successful, since who is left to buy once the company does get listed?

Sector Revaluation

But there was another way to play the HOOD IPO. When there is a hot new stock coming to market, other stocks in the sector may light up and catch a bid. If a stock is getting a high valuation when listing, or is running and its valuation is increasing, traders start to look at other stocks in the same sector.

The psychology behind this is that if one stock in the sector increases in value, then other stocks in the sector might also be relatively cheap and should also be revalued. We saw this last year in the electric vehicle sector. As TSLA increased in value, so did its competitors with stocks like NIO, XPEV, FSR and CCIV (now LCID), all increasing significantly in price in sympathy last year.

IPO runup

The same thing can happen coming into IPO’s. For example, a few years back in 2019, coming into the UBER and LYFT IPOs, HYRECAR INC (HYRE) saw a nice run up once the IPOs were announced before selling off into the IPO. UBER and LYFT were in the ride-sharing sector, and HYRE was one of the few small cap stocks also in this sector.

History repeats, and I got long FTCV to play the run-up into the HOOD IPO despite being bearish on HOOD itself. FTCV is a SPAC that will be merging with E-Toro; also an online brokerage and, like HOOD, is relatively new in the space and has unique characteristics.

The SPAC was priced at $10, which is effectively the IPO price. Here is my note from July 22nd when I took the position

We were close to the $10 SPAC offering price, and I believed that FTCV could have a nice pop in sympathy coming into the HOOD IPO.

HOOD IPO

What happened coming into the HOOD IPO? Nada, the stock sat at $10.50, and then the IPO came on July 29th. Just as I had warned, the HOOD IPO was a disaster on day one. The stock failed to hold above the $38 IPO pricing and closed the day at $34.81, down about 10% on the day.

FTCV did in fact, trade in sympathy and sold off, closing the day at $10.20. I was definitely not the only one taking the sympathy trade, and the market shook some of these people out. But I liked the stock and was happy to hold it coming into its own IPO. So long as it was at or around $10 there was no reason for me to get out of FTCV trade from a risk management standpoint. Unlike HOOD, I thought FTCV was reasonably priced and was happy to hold it.

Now what happened next was a bit of a surprise. After holding the lows from day 1, HOOD consolidated for two days closing near $38 on day 3. On day 4, HOOD broke above the IPO price of $38 and trended all day to close at $46.68. What this told me was that I wasn’t the only one thinking the HOOD IPO was overpriced and some big players must have been stuck short!

And if I’ve seen anything from the past couple of years, if there is a trapped short seller, the market is going for blood. On day 4, HOOD exploded to a high of $85. In hindsight, this is pretty logical. Previous hot IPO’s such as ABNB and COIN all opened up 50-100% on day 1. Add some trapped shorts to HOOD, and we got a similar outcome but a few days post IPO.

The HOOD daily chart post IPO

Sympathy Buying

Now, seeing HOOD ripping on Day 4, what do market participants begin to do? They look for sympathy plays. By 9:45 am HOOD was up 70% on the day, and almost 100% from its IPO price. FTCV was sitting at $10.30, up only 2% on the day, some buyers were nibbling, but it wasn’t really doing much.

Then bang at 9.55 am, the crowd finally caught on, the algos were turned on, and FTCV had a nice trend day hitting a high of $12.07 late in the day up 20%+.

The FTCV hourly chart coming into and post HOOD IPO

It took a while, but the sympathy play finally played out, and I made a great trade. It only took HOOD to be up 100% for buyers to find FTCV, but eventually, they did. In hindsight, that would have been a great opportunity to load up, I’d already done all the hard work and that was a moment to get bigger for all the day traders out there!

Bottom Line

When there is an IPO in a hot new sector, it is vital to do your homework about the company that is coming to market and other listed companies in the sector. This can provide some nice trading opportunities as these companies can move together in sympathy. A move in one can precede a move in the other as market participants begin to re-rate the value of businesses in the sector. Trading is competitive and staying one step ahead of other participants is vital to spot trading opportunities.