Alibaba shareholders have suffered a torrid few months, shares falling from $120 last November to $81 last week, erasing some $100 billion in market value.
It may get worse – tomorrow, 437 million shares become eligible for sale as the firm’s post-IPO lockup period expires.
The potential for heavy selling is obvious. The number of shares available for sale is even greater than last September’s much-hyped IPO, when 368 million shares hit the market. Recent share price falls may not dissuade insiders from selling, given Alibaba remains above its $68 IPO price.
Research shows lockup expirations typically generate price drops amongst heavy trading.
Trading volumes surged tenfold when Twitter’s six-month lockup expired, shares skidding 18 per cent. Facebook’s first two lockup expirations saw declines of 5 and 3 per cent respectively.
However, a decline is no sure thing. Shares actually rise in a third of lockup expirations.
Indeed, Facebook shares enjoyed a fine relief rally after its six-month lockup expired, surging 13 per cent.
However, sentiment had begun to turn positive for Facebook prior to that rally, whereas there’s been no hint of an end to the Alibaba downtrend.
Investors who bought into the hype are now deep in the red, and must surely be nervous of further bloodletting.
Bull market reaches ripe old age of six
The US bull market celebrated its sixth birthday last week. How much longer can the good times last?
The bull cycle, if it lasts another two months, will become the third-longest in history. Including dividends, stocks have gained 244 per cent, making it the fourth-strongest on record.
Only one other bull market – the 1982-87 rally that ended on Black Monday – saw bigger gains within a six-year period.
Clearly, as Strategas Research Partners note, the current rally is “extended in terms of magnitude and duration”.
However, LPL Financial argues rallies do not die of old age (the longest bull, between 1987 and 2000, lasted 13 years).
Rather, they die of excesses, something they see little evidence of today. LPL looks at five late-cycle warning signals, ranging from waning market breadth to valuation and economic data. Only one – valuation – looks iffy, and even that is not a reliable short-term indicator.
In short, despite recent underperformance, the US bull market may well be celebrating its seventh birthday this time next year.
Apple added to Dow – ain’t that quaint?
It may seem quaint that Apple, easily the most valuable company in the world, is only this week being added to the Dow Jones Industrial Average.
That’s because the index is, well, quaint. The Dow, consisting of just 30 large-cap stocks hand-picked by Wall Street Journal editors, is hopelessly undiversified compared to the S&P 500.
It’s also price-weighted. A stock trading at $100 would make up five times more of the index than a stock trading at $20.
Accordingly, less valuable firms like Visa, Goldman Sachs, 3M, IBM and Boeing will influence the Dow's movements more than Apple. Indeed, Visa's 4-to-1 stock split later this week will have a bigger impact on the index than Apple's addition.
It’s daft, but Dow investors have done just fine, the index almost exactly tracking the S&P 500 over the last 65 years.
Indeed, the market-cap weighted S&P 500 is also far from perfect, as it gives more weight to overvalued stocks and less to undervalued ones.
The best approach may be to buy equal-weighted indices, where every stock carries the same weight – that has produced the best returns in recent decades.
No cause for panic in current selloff
Every time there’s a market selloff, investors ask: is this it? Is a correction coming?
Last week's US market weakness inspired money manager Dana Lyons to analyse other examples where stocks declined at least 2.6 per cent in March from a recent 52-week high.
There have been 29 such cases since 1950. In every single case, stocks were higher three months and six months later.
A year later, stocks were higher on 27 occasions. In all timeframes, average returns were better than normal.
Many get jumpy every time there’s a market hiccup. They shouldn’t.
Will investors ride out market volatility? Three-quarters of US investors say they will ride out market volatility, according to the latest Gallup Investor and Retirement Optimism Index survey.
Fine words, but it’s hard to believe them.
More than half say they are either very or somewhat concerned by market volatility, despite the fact there’s been precious little volatility relative to history.
It’s easy to be brave when times are good. Today, optimism is at its highest since 2007, although nowhere near levels registered at the market top in early 2000. The most pessimistic readings occurred at major market bottoms in 2002, 2009 and 2011.
It’s all very well to talk about riding out market volatility. Doing it is another thing altogether.
