Should You Trade High-Profile IPOs?

11/03/2011 1:30 pm EST


Michael Bellafiore

Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading

Trading high-profile IPOs may seem appealing, but Michael Bellafiore explains that such IPOs typically present good set-ups only for short-term momentum traders. All others, use caution.

There have been a few high-profile IPOs in the markets these days, but as a trader, should you be trading these on the first day, or even the first week? Our guest today is Mike Bellafiore, author of One Good Trade, here to talk about that. 

So, Mike, we’ve had some high-profile IPOs this year. We’ve had Pandora, we’ve had LinkedIn; is it a good idea to trade those the first days they’re out? 

Only if you’re a seasoned, professional momentum trader, but, yeah, there’s a lot of really great opportunities, and LinkedIn (LNKD) is a tremendous example. 

LinkedIn, for an investor, on the first day was not a good opportunity. There are a lot of really smart people who thought in the 80’s, it was just a terrible price, and then it shot up all the way to $122.

But there was a nice consolidation that formed between $85 and $88. LinkedIn got priced higher than originally thought; it gapped up, and it wasn’t going down. It was stuck between $85 and $88. 

If you’re a professional momentum trader, when it ticks above $88, that’s a lock, and you play the momentum with that. Now, we’re trading on a very short time frame—the ticks and the tape—and you’re going to have to get out when it slows, but we can see that.

So, that was a great trade. Actually, when LinkedIn pulled back the first time to that $85-$88 area, there was really a nice technical play there to buy, to see the stock bounce back up to $100, and then sell as it was going back up. It’s not an investment, but a really great trade. 

Recently, I actually was on a forum with Josh Brown, reformed broker, really one of the really terrific blog writers today, and Leigh Drogen, who knows everything about all this stuff. We were asked if we think social media is in a bubble, and everyone said, “Yes,” except for me.

I actually love seeing what’s going on in Pandora (P). I wouldn’t lump that into the social media space like LinkedIn, but, yeah, we’re going to see this. Zynga is going to go public. There’s a backlog for the first time in a long time of really great IPO opportunities that are going to be coming forward.

In April, that was the hottest IPO period in terms of IPOs coming out in the last seven years. I think there were 159 companies that filed to actually go public by the end of the summer. So, yeah, that’s a hot market, and there’s money to be made if you’re a short-term momentum trader.

Is the technical analysis you do on that no different than you would on a GE or an IBM or something that’s been around for 100 years?

It’s better. Technical levels hold better in IPOs because there’s less points to actually look at. How can you be confused? It’s trading between $85 and $88; it gets above $88; there’s no top, there’s no ceiling to that. 

When it pulls back, we know it broke out from that level, and that’s it; that’s all we really know. There are no other levels. 

So, they’re cleaner. One of the great trades is to flag an IPO for a couple of days, and let’s say it can’t get above $25, which is a more normal price for an IPO. It just can’t; it’s not going down, but it can’t get above $25. 

Then on day three, when no one is paying attention, it gets above $25, and it just rockets up to like $28 or $29.  They’re clean plays.

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