Opinion: This signal indicates that a market correction could be in progress


I hear more fund managers say it’s starting to look like 1999 – the year of the bubble followed by an epic market crash.

They can be on to something.

The initial public offering (IPO) is now showing the scum that portends big market corrections.

Consider these disturbing signals from the IPO market.

1. Disturbing volume: The second quarter IPO proceeds were the largest since – see – the fourth quarter of 1999. The huge tech sell-off that marked a generation of investors began in March 2000 and then continued. is extended to the entire market.

A Few Details: A total of 115 IPOs raised $ 40.7 billion in the second quarter. This follows a busy first quarter when 100 IPOs raised $ 39.1 billion. The two quarters saw the highest amount of capital raised since the fourth quarter of 1999, when IPOs raised $ 46.5 billion. These figures come from the IPO experts at Renaissance Capital, which manages the IPO exchange-traded fund, Renaissance IPO ETF IPO,

Of course, adjusted for inflation, the numbers for 2021 are down from the fourth quarter of 1999. But that does not help us. The 2021 IPO figures above exclude the $ 12.2 billion and $ 87 billion raised by Special Purpose Acquisition Companies (SPACs) in the second and first quarters.

This spike in IPO volume is troubling for one simple reason. Investment bankers and corporations know that the best time to sell stocks is around market highs. They make companies public at their convenience, not ours. This tells us that they can sell a high now.

Here are the other worrying signs of foam in the IPO market.

2. Technology is leading the way: It dominates the IPO market again, just as it did in 1999. The tech sector raised the majority of second-quarter revenue and recorded its busiest quarter in at least two decades with 42 IPOs, according to Renaissance Capital. This included the largest IPO of the quarter, DiDi Global DIDI,
the Chinese carpooling application. The big US-based tech names were Applovin APP,
in the application software, robotics company UiPath PATH,
and the Marqeta MQ payment platform,

3. We can expect more of the same: A strong IPO pipeline is setting the stage for a booming third quarter, according to Renaissance Capital. The IPO pipeline has more than a hundred companies. Technology dominates.

4. Sparkling gains of the first day: The average day one pop for Q2 IPOs was 42%. This is well above the range of 31% to 37% for the previous four quarters.

5. Historically high valuations: Typically, tech companies have gone public with enterprise value (EV)-to-sales ratios of around 10. Today, many go public with EV-to-sales ratios of between 20 and 30 or more, Avery points out. Spears, an IPO. analyst at Renaissance Capital. For example, the cybersecurity company SentinelOne S,
went public with an EV-to-sales ratio of 81, Spears says.

6. Retail investors in the mix: They are big participants in IPO trading – often driving IPOs crazy amounts in day one trading. “In the second quarter there were a lot of small trades with low floats and absolutely insane trading, well over 100% and in one case over 1,000%,” says Spears. Pop Culture Group CPOP,
increased by over 400% on its first day of listing, and E-Home Household Service EJH,
advanced 1.100%. “This demonstrates the presence of retail investors in the market,” she said. Both names have since fallen.

Keep in mind that the 2000 liquidation wasn’t the only one heralded by IPO foam. Massive sales from mid-2015 to early 2016 and the second half of 2018 were both preceded by high levels for IPO volume.

IPO-foam repels

“It’s different this time” are perhaps the most dangerous words when it comes to investing. But market experts say several factors suggest that the robust IPO market is not such a negative signal.

First, decent quality companies go public. “Because companies stay private longer, you see much more mature companies going public,” says Todd Skacan, director of equity markets at T. Rowe Price. It’s not like the speculative Internet companies of 1999. “It would be more of a scum signal if more limit companies went public like in the fourth quarter of 1999,” he says.

We’ve seen some of it with PSPCs, Skacan says, but the craze for PSPCs has died down. SPAC’s second-quarter issuance fell 79% from the first quarter, mitigated by “investor fatigue and regulatory scrutiny,” according to a Renaissance Capital report on the IPO market. In the second quarter, 63 SAVS raised $ 12.2 billion, against 298 SAVS which raised $ 87 billion in the first quarter.

Then, the type of business going public could also allay fears. Next to all the tech names there are plenty of industrial and consumer-oriented companies – not the types of companies that point to foam. The latter category includes public national brands such as Mister Car Wash MCW,
and Krispy Kreme DNUT,
and the high-growth oat milk brand Oatly OTLY,

Third, IPOs only float 10-15% of their overall value, and many post-IPO valuations aren’t much higher than the valuations implied by pre-IPO capital increases. It’s different from 1999. “It’s not like they’re selling a lot of stocks at inflated prices,” Skacan says. This makes sense, because companies that are more mature when doing an IPO don’t need that much money.

Cash flow

“I think that says more about general liquidity than the future of the stock market,” says Kevin Landis of Firsthand Technology Opportunities TEFQX,
referring to the IPO frenzy. “There is so much money circulating. Capital markets are like the rich man from out of town who just got off the cruise ship, and we all come out of the woods to sell him stuff, ”he says.

“Things are going up just because of liquidity, which means there will eventually be a top,” says Landis. “But not necessarily an impending summit around the corner.” Landis is worth listening to because his fund outperforms its technology category by 9.6 percentage points annualized over five years, according to Morningstar.

The bottom line

Market calls still fall under what intelligence spies call “the mosaic.” Each bit of information is a piece of an overall mosaic. While the foam in the IPO market is worrisome, you should consider this warning signal as just one of many.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned APP. Brush suggested APP in its stocks newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks,

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