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The IPO Market’s Predictive Abilities at Trader’s Narrative

The IPO Market’s Predictive Abilities

In this weekend’s Barron’s there was an interesting mention of research from Thomson Financial on the predictive abilities of the IPO market. They looked at whether an IPO trades above or below its price range and what bearing that has on the market going forward. Here’s an excerpt:

“THE BROAD MARKET IS WAY OFF its new highs, but according to one sentiment indicator of investor interest in initial public offerings, it still has plenty of room to run.

Thomson Financial calculated the ratio of IPOs that came out above the range of their expected offering price to those below the range on a quarterly basis going back to 1988, and found that periods where below-range prices dominated (ratios below one) were followed by above-average stock market returns in the next 12 months. The results are similar for shorter periods of three and six months.”

The bad news is that the second quarter of this year had an IPO market just slightly above the range, but the good news is that for all the four consecutive quarters before it was below. And for the month of July we are set to come in below again as well (at 0.7).

According to Steve Krull from Thomson Financial, this presents us with “a moderately bullish stance” where the S&P 500 is expected to end the year at 1700. As they mention in the article, this is just a tiny bit of an indicator and not something to trade on necessarily. But interesting nonetheless to tuck under your hat.

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