May 22nd, 2012

FB or Las Vegas? I’ll take Vegas

I was asked several times last week whether I would buy FB (Facebook) at the IPO.  Those who asked have no real concept of technical analysis or my style of trading/investing.  At its core, technical analysis is an approach to the stock market based on notions of supply and demand, of equilibrium and imbalance, of dynamic and static.  When the supply and demand situation of a stock is in balance, its price will remain within a relatively narrow range; when the equilibrium in a stock’s supply and demand is disrupted for some reason, price begins to move out of the range.  That movement begins to feed on itself, momentum is launched and that “trending” continues until supply and demand gets back into balance and a new condition of equilibrium sets in.

By its very nature, there’s no way of telling where a stock’s equilibrium will be.  We know the price that the underwriters have established as the IPO price but there’s no way of telling where the supply and demand pressures coming from the rest of the investment world work themselves out establishing a true market-based equilibrium level.  And even then, that equilibrium level price will likely be only temporary as it’s relatively easy for pent up supply and demand factors to disrupt the balance.  The process can continue for some time until all the conflicting forces work themselves out.

Traditional technical analysis tools such as moving averages, trendlines, resistance and support levels are meaningless when it comes to IPOs, even with several weeks and months of market trading after the actual IPO date.  Are you kidding me?  Is this a chart on which you can make any sort of “technically intelligent” investment decisions, whether to buy or to sell?

All the hype of the past 2-3 weeks has been nothing more than a crap shoot, a ploy to enable the underwriters to unload their stock at a price they determined the market would bear.  Anyone who bought the stock through an allocation of IPO shares was doing nothing more that putting some money down at a craps table.  One would have to be a seer, fortune-teller, medium, prophet to be able to tell whether the stock, once publicly traded, would trend higher or lower or just stay around the IPO price.  Or, you had to have so much in cash resources that you could control the price in any way you wanted.

That’s not anything that anybody who believes in the principals of technical analysis would participate in.  It’s not even interesting or exciting to watch simply because we know that within a couple of months the price will be substantially different as market momentum begins to overwhelm the underwriters and the large institutions that they enlisted through “friends and family” discounts to help them distribute the inventory of stock to the unsuspecting public.

“But where do you think the price will be by the end of the year?” I was asked.  My answer, the one I keyed into the notes app on my iPad was that “FB will have hit 15-18 sometime by the end of the year”.  Since I have no basis for that sort of prediction, I can’t short the stock or buy put options on it; I’d rather go to Las Vegas to the Blackjack table because the odds there are more readily available.  What say you though.  What do you think FB’s low will be for 2012?