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IPO trends 1999 to 2010 partial Jul 2010The IPO market is a litmus test for the broader stock market. Historically, when we see a healthy pipeline and reception for IPO’s, this signals a healthy bull market.

Of course, excesses and speculative peaks in IPO activity also correspond to major market tops. At the following link, you can see a historical chart of IPO pricings going back all the way to 1973. Right now we’re seeing one of the weakest IPO markets in modern history.

The worst drought occurred in 2008 as the equity and credit markets seized up in a spasm. Since then, things have improved slightly but we are still well below the average or what would be considered normal.

That’s why I think a high profile IPO like Tesla Motor’s (TSLA) recent public offering can act as a tell for not only the IPO market but for the general market. Not only does Tesla represent the next generation of innovative companies, it is a very sexy product/story. At least for guys.

The IPO was priced at $17 and it experienced something we hadn’t seen in a long time, a first day pop!. It went on to hit an intra-day high of $30.42 in its second day of public trading. But that was the end of its outperformance as it fell down hard to where it first crossed, at $19.

tesla motor TSLA IPO Jul 2010

Right now, almost everyone who initially bought Tesla is still happy. But if it declines below $19, then we could see selling beget selling as stop losses are triggered. Since Tesla is an unprofitable and unproven company, it will only attract the most speculative holders with a very short attention span and even shorter patience.

The intraday action lead to a very ugly daily candlestick formation known as an inverted hammer candlestick. Usually we see this form at tops as it implies that an intraday battle was lost by the bulls. At first I was very excited to participate in the Tesla IPO because I thought that an upcoming rally in the general market would give it even more wind in its sails but with the deterioration in market breadth, I think that this is not probable. This means that Tesla is even more vulnerable.

By the way, for some reason there is a misunderstanding in most traders’ minds that IPO’s can’t be shorted but the truth is that it really depends on your broker. If they can locate shares for you to borrow, then you can short it. I checked with my broker and they have 150,000 available.

Source: Tesla IPO as a Barometer for Market Health