Though I was initially much less interested in the Facebook IPO than the traditional media focus on the subject, Friday’s price action in Facebook quickly got my attention. It reminded me of a trading maxim that has served me well in my career. Simply put, “If it doesn’t go up, then it’s probably going down.”
Let me briefly explain what I mean. As a trader, you frequently encounter headline events that on your first assessment are either a plus or a minus for the stock. For example, you might see a headline along the lines of: Brazilian government cancels Chevron’s drilling contracts. Your first assumption is that Chevron stock is probably going lower, no matter the details (on rare occasions, a negative headline might actually be positive due to the details, and vice versa). If I watched Chevron’s stock only go down slightly over the next 30 minutes as the market digested that news, then that would be a good sign that the stock was probably going up for the balance of the day. In this case, “if it doesn’t go down, then it’s probably going up.” In other words, if bad news cannot induce more aggressive sellers than buyers and hence make a stock go down, then the demand for the stock is probably quite strong.
On the flip side, in the case of the Facebook IPO, despite all the headlines and media hype and buildup to the event, the stock ended almost at the issuance price. So much good news, but it did not go up. Meaning, it’s probably going down. And here’s a Reuters article about the details of the much-talked-about $38 bid from banks on Friday, and how long that might last. But for a great market indication (as usual, I like to use market prices as my guide, rather than media headlines) of how poorly the Facebook IPO trade, simply take a look at what happened to the other social media stocks.
Today’s chart illustrates that weakness by showing the trading action of 5 social media related stocks over the last 20 trading days:
As you can see, the stocks almost all rallied from May 11th to May 16th (even while the market dripped lower), but Thursday and Friday, the day before and the day of the Facebook IPO, all of these names got hit, with even a low-volatility name like GOOG getting hit. This price action indicates a few themes: 1) existing investors in social media names see the weak FB price action and decide to trim their social media exposure in general. 2) investors who bought a lot of the FB IPO and see the weak FB price action might short the other related names as a hedge. 3) the underwriters who are buying FB stock to support it at $38 might sell the other names as a hedge.
Given that GOOG is the only very liquid related name, if the underwriters were looking to hedge their FB buying, that would be the main name they would sell. Watch the price action in GOOG in particular this week as an indication of the underwriters potentially hedging if they have to buy more FB stock. In general though, this type of related name analysis is a good way to assess how big institutional players are moving their portfolios around major market events.