The Stock Market's Facebook Physics
The downside momentum in this market since the first of May has been a particularly good illustration of Newton's First Law of Motion. It has been one-way action with barely a pause. In fact, the selling has even intensified in the last couple days as we've become increasingly gloomy and oversold.
If you have been a trend follower and respected the momentum, you've had plenty of warning to move out of the way. But it still is a difficult market to trade since the action has been so relentless lopsided. The biggest mistake you can make in this sort of environment is to keep on anticipating a low. It is hard to resist that game, but this market action shows while trend followers do what they do rather than look for turns.
In many ways the action is the mirror image of what we had in the first quarter when the market levitated with barely a pause. We just kept on getting more and more overbought and never had any easy entry points along the way. Currently, we are becoming more and more oversold. But we aren't seeing any bounces, which will allow for escape or some fast trading.
The big question we confront today is whether the massive Facebook(FB) IPO might be the unbalanced force that causes a market shift. Some folks believe that some of the recent market pressure is due to institutions raising funds to buy the Facebook IPO. If that is the case they have already raised far more cash then they need and have lost more by selling into weakness than they are likely to gain by buying the IPO.
While the Facebook IPO may have caused a little bit of the recent selling, I don't believe it has been a major factor. The news flow out of Europe and our tepid economic news is more than sufficient to generate the selling we have seen lately.
So, will Facebook help this market to find a bottom? While it may provide a respite from the downside momentum I'm not very optimistic that it will mark a bottom. This is a massive IPO and it is loaded with flippers and short-terms who are anxious to take some quick profits on a good opening. The skepticism over the valuation is very high and with such a huge float it is going to take some major chasing to keep the momentum going.
If Facebook opens up big and fades fast, it is not going to help the mood very much. And if it opens mixed, I'll be surprised if there is enough buying to really drive it. Maybe I'm underestimating the retail desire to own Facebook shares, but it sounds like the allocations are quite generous and that is going to sap quite a bit of the support once the shares start to trade. I received some shares and I will definitely be inclined to do some flipping into strength.