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Trading tips week 34 - technical analysis: Kim

James Kim, sales trader at Saxo Capital Markets, Australia, examines trading strategies during week 34 in a technical analysis of charts for forex, indices and commodities.

10h The week ahead in macro — #SaxoStrats

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4d From the Floor: Dovish FOMC keeps USD on the defensive

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Article / 17 May 2012 at 7:20 GMT

Facebook IPO: if you got it, lucky you, if you didn't, stay out

Matt Bolduc

Equity Analyst

Denmark

If you were lucky enough to get a piece of the Facebook IPO, congratulations. If you couldn't get any of the IPO shares, stay out until the insanity dies down as many investors will try to get in regardless of cost. This was echoed by Steve Wozniak, co-founder of Apple, who said he would invest in Facebook at any price.

If we look back at the most recent technology IPOs, on average, investors were strongly rewarded once the stocks started trading - average basket gain of 45 percent on the first day of trading. The same cannot be said for investors who got in after the first day of trading. If you had bought the same basket the day after the IPO, you would have lost 7 percent compared to the 34 percent gain you would have had if you had the IPO shares. That's quite a difference - 41 percent! Therefore if you had the IPO shares, good for you, and if you didn't, well that wasn't good.

IPO basket

The same results can be found by tracking the IPO performance through 1, 3 and 6 months. So what is the history lesson here? Basically if you have or had the opportunity to get in on the Facebok IPO you stand to make a nice, quick chunk of change otherwise you should probably wait until the hysteria dies down.

2nd day basket

The tell-tale sign that Facebook is going to skyrocket on the first day is that the investment bankers have increased the pricing range of the IPO as well as the allotment. This means that there is plenty of pent up demand for the IPO - a lot of demand that will have to be satisfied once the stock finally trades. In this case, the valuation and the fundamentals simply do not matter in the short term, this is a pure 'greater fool theory' trade.

So if you were looking to get into Facebook and couldn't get some IPO shares, do fight the urge to get in on the first day. Let cooler heads prevail, and wait for the price to come down, this isn't a guarantee but if historical probabilities are correct, it could save you a lot of money.

P.S. Just for fun, I will 'predict' that Facebook should easily gain 30-40 percent on the first day....

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