In a week where COVID-19 cases exploded, a Supreme Court decision seems to have finally concluded the U.S. Presidential Election, and little economic data was released, the stock market was looking elsewhere for guidance. The financial media and much of the stock market’s attention was instead focused on two money-losing companies, whose initial public offerings recorded spectacular gains last week.
Last Wednesday, stocks for food delivery service DoorDash (DASH) hit the market, rising to close the day 86% higher than it opened. Even though it closed the week below its highs, it was still valued at $66 Billion. That is more than many established companies like Domino’s Pizza Group (DPZ) which has a market capitalization of just over $15 Billion.
DoorDash has lost $149 million for the first nine months of 2020, in contrast to Domino’s Pizza Group, which reported $99.1 million of net third-quarter income. On Thursday, Airbnb (ABNB) opened on the Nasdaq at $146 per share after an IPO price of $68, and closed the week with a market cap of $83.2 billion.
Since Airbnb was started in 2008, it has recorded $2.1 billion in losses. Its valuation is now significantly greater than they stated during the early days of the pandemic, and that was before taking heavy losses in Quarter 2. Many analysts are finding it difficult to justify ABNB’s post-IPO value, which is greater than that of Marriott International (MAR), Hilton Hotels (HLT), and other better-known companies.
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The University of Florida’s Jay Ritter commented in a Bloomberg article that “80% of the companies that went public this year were unprofitable in the 12 months prior to the IPO.” Still, the Renaissance IPO ETF (IPO) is up 111.52% year to date (YTD). This ETF has 48 holdings with over 10% in both Uber Technologies (UBER) and Moderna (MRNA). It has $670 million in assets with a somewhat-high expense ratio of 0.60%.
The daily chart shows a move through resistance (line a) on November 20, 2020. It had a high this past Wednesday of $67.74 but closed at $64.70 with the heaviest volume of the year. Its relative performance (RS) versus the S&P 500 moved above its resistance (line b) just after the price breakout, signaling that IPO was leading the S&P 500.
The on-balance-volume (OBV) broke through its resistance (line c) two days before the November 20 price breakout and made a new high on Tuesday. The OBV is still well above its rising weighted moving average (WMA) and is positive. There is price support at the rising 20-day exponential moving average (EMA) at $62.02, and also at the monthly pivot at $59.64. The breakout level is a bit lower, at $57.58.
The markets were generally lower last week, but the iShares Russell 2000 (IWM) was up 1.1% for the week, and has outperformed the S&P 500 year-to-date. The Nasdaq 100 ($NDX) was down 1.2% last week, but is still up 41.7% YTD. For the week, the advance/decline numbers were neutral, with 1602 issues advancing and 1618 declining.
The rally in the IWM has been impressive, as it has exceeded the weekly starc+ band each of the past five weeks. This is a sign that IWM is in a high-risk area just like the $NDX was in February. The rising 20-week EMA at $164.74 is strong support.
IWM broke out of its trading channel (lines a and b) in the middle of November. The breakout level is now at $171.06 which is 10% below Friday’s close. The Russell 2000 advance/decline line overcame the early 2020 highs over the past two weeks, which has confirmed the price action. The A/D line is far enough above its WMA to generate an overbought warning.
The Spyder Trust (SPY) dropped towards its 20-day EMA at $362.56 on Friday, as it is has corrected 2% from Wednesday’s high at $371.05. There is stronger chart support in the $354 area, with the 38.2% Fibonacci support of the rally from the September lows at $351.45. The upper boundary of the complted flag formation (line a), another support level is at $348.75.
The daily starc+ band is now at $375.09, with the weekly starc+ band at $387.62. The upside targets from the completion of the flag formation range from $376 to $386. The daily S&P 500 advance/decline line closed below its rising WMA on Friday. A decline below the prior lows will indicate a test of the more important support (lines c and d).
So does the current IPO mania change my outlook for the stock market? I do not think that it will limit the market’s upside as we head into 2021, nor trigger an early end to the rally. But for those of us who observed traders just ahead of end to the dot-com bull market in March 2000, it is not a reassuring development. I think this focus on IPOs is likely to play a role in determining where stock prices may be a year from now, as their dominance reduces the investing pool, and in the future may cause investor disappointment or disillusionment.
I am still concerned, as I was last week, that the inability of the U.S. Senate to pass a stimulus bill to support the currently-weak economic recovery may trigger a sharper market decline.
For those investors who are 70% invested or more in the markets, I would suggest that you bank some profits as we head into the end of the year. For traders, I would look to take profits preferably as the market moves higher and protect profits with stops.
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