Geoff Bysshe | Aug 02, 2021 12:06AM ET
Last week the much anticipated Robinhood (NASDAQ:HOOD) IPO and several high-profile earnings announcements revealed a lot about investor sentiment and what to expect for the market’s trend going forward.
First, the Robinhood IPO had the potential to create an obvious indicator of a market top considering:
In short, a big jump after the IPO with all the typical fanfare would have been a stereotypical “irrational exuberance” event. Instead, as markets often do, the opposite occurred, and the bulls should be thankful.
As you may already know, i’s been labeled as the worst IPO of its size ever. Retail investors who finally had the opportunity to “get in early” (at the IPO price) got hurt. Social media seemed to have more negative sentiment than positive and several companies that were expecting to IPO soon, decided that now was not the right time.
The bulls should be thankful that this event didn’t create an excessive blow-off top event in the market.
Now, what can we learn from this? Retail trader market sentiment is not as bullish as one might have thought? If you don’t prevent a segment of investors who would like to get in on the IPO price from having that opportunity, you may not have enough new buyers on opening day?
I’m not suggesting that the normal condition, whereby most retail investors are not able to participate in pre-IPO pricing is fair, but if that changes, so will the way markets operate. This could be a case of “beware of what you wish for.” The savvy trader knows to always be on the lookout for the market’s unintended consequences. Even Goldman Sacks and JP Morgan working together can’t prevent the market from sinking a stock.
The bearish open also gives traders an opportunity to use the strategy of waiting for an IPO to form a range and play the breakout. This approach can work very well when the high of that range is the IPO day.
Last week’s earnings announcements provided some very similar information about traders’ sentiment. Stocks such as Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL) had strong earning reports that were met with selling.
Good news met with bearish price action is bearish. However, the most likely time for the market to react in a significantly negative way is when there is bearish news. As a result, be careful about buying a dip that is the result of bearish news. Additionally, we’re entering one of the seasonally weakest times of the year.
Barrons reports that:
“According to data going back to 1928 compiled by Bank of America analyst Stephen Suttmeier. He finds that the S&P 500 index had a negative return averaging 0.03% in August, September, and October—the worst three-month span of the year for the big-cap benchmark. In fact, they constitute the only three-month period that averages in the red.“
This data doesn’t need to imply a big move lower, but combined with the analysis below highlighting the market’s lack of, or even declining, bullish momentum, suggests it’s time to be very focused on risk management.
h2 Past week’s market highlights/h2(links with a “$” will only be accessible by MarketGauge.com premium members)
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