The IPO market is red hot, but IPOs like Uber are debuting in a period of hostility and volatility for stocks.
Looking at S&P 500 SPX, -0.57% data going back to 1970, the benchmark index is entering the worst six months of the year (May-October). During that time, stocks don’t perform as well and are vulnerable to pullbacks. (Uber UBER, -0.80% whose shares started trading Friday, is already being dinged.)
From May to October, the S&P 500 gains on average 1.51%, compared with 6.65% from November to April.
The charts below show the maximum upside potential and downside risk for both periods. The downside risk from May to October is 30% higher than the other half of the year, and so is the risk of a 10%-plus decline.
Similar seasonal patterns apply to the Dow Jones Industrial Average SPX, -0.57% Nasdaq COMP, -0.82% and Russell 2000 RUT, -0.83%
Of course, this doesn’t mean that stocks and IPOs can’t rally from May to October, but the odds of losses are significantly higher.
The VIX VIX, -1.88% has been forming another dangerous (for stocks) wedge formation. This also happened at the January and October 2018 highs.
The chart below, originally published in the April 14 Profit Radar Report and this MarketWatch article, provides a visual. The last two times the VIX broke out of its wedge, stocks ended up falling for weeks.
When volatility rises, there’s also more fear, and a fearful environment is rarely great for IPOs.
‘Scissor pattern’
Even though the S&P 500 has popped and dropped more than 100 points since April, trade is still confined between the scissor-shaped support and resistance I’ve been watching.
New IPOs start with a blank canvas, and don’t have support/resistance levels.
Traders of S&P 500 ETFs like the SPDR S&P 500 ETF SPY, -0.50% or Vanguard S&P 500 ETF VOO, -0.48% and inverse S&P 500 ETFs like the ProShares Short S&P 500 ETF SH, +0.54% or ProShares UltraShort S&P 500 ETF SDS, +1.09% may use the green and red line as entry and stop-loss levels.
A longer-term outlook is available via this S&P 500 update.
Simon Maierhofer is the founder of iSPYETF and publisher of the Profit Radar Report.
