IPO as an indicator of market cycle and volatility

A pandemic has caused several disasters, many deaths, faster transformation to a greener economy.

On the one hand, the correlation between the number of new IPOs and the market cycle is evident. On the other hand, we must note that in the long run, there will most likely be more and more IPOs than in previous years. From this point of view as well, it may seem that this is a similar scenario as in the past (the number of IPOs reaches extremes) and act as a leading indicator of financial market overheating. Still, at the same time, the factors mentioned above may be behind the higher number of IPOs this year. And we believe that in 2021, the total number of IPOs will be even higher.

Objectively, the number of IPOs varies considerably from year to year. It is always necessary to look at the source and the methodology. For example. If we took the data from AuditAnalytics, which focuses on two major US stock exchanges, we would have slightly different numbers. 

Source: AuditAnalytics

AuditAnalytics reported higher numbers than in 2000 (Dot Com Bubble), but here we can see that SPAC IPOs have a significant share of total IPOs. SPAC confuses Special Purpose Acquisition Company. In other words, this company is created through an IPO (thus raising capital) to “acquire” or “merge” another company. As this form is becoming more popular, it is no wonder that companies are starting to use this tool. 

The IPO is very popular even in the first trading days. Traders thus use different strategies to trade these newly listed companies on the stock exchange. The reason is the high volatility on the first days and the weeks after the launch. Below is another source (chart) that monitors the number of IPOs and the average return on the first trading day of the stock exchange. 

Deliberately note the year 2000, where the average yield for the IPO on the first trading day was high. Similarly, we are starting to climb in 2020. Some will notice that the methodology is significantly different from the previous charts, and thus the number of IPOs each year. If you want to go into detail, I highly recommend this PDF, which diverse IPO data, whether by country or sector. 

Source: Warrington UFL


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