The IPO market is coming out of hibernation…
Now that America is great again, these new stocks are free to slingshot to the moon for any reason you can imagine.
Snap Inc. (NYSE:SNAP), the creator of the Snapchat app that’s constantly distracting your kids during dinner, debuted on the market yesterday to a hoard of hungry buyers. The shares traded nearly 50% above their initial pricing even as an analyst slapped the stock with a downgrade right out of the gate.
The joke’s on you, Wall Street! A dismal price target of $10 per share didn’t deter a single speculator. Never mind that no one older than 25 can give me a clear explanation as to how Snapchat operates or why it’s so popular. Everyone wants a piece of the action. Snap is worth three Twitters, increasing its market value by almost $9 billion on its first trading day
These gains are enough to make even the most seasoned trader salivate.
But that doesn’t mean you should throw all your money at the Snapchat IPO and pray to the market gods that the stock continues to defy gravity.
If you’re going after new stocks, you need to know how to trade the IPO sweet spot. This strategy is the only way to safely play for the big rips higher while avoiding catastrophic losses.
IPOs are one of the trickier trades on the market. It’s tempting to take a huge hack at them right when they begin trading– especially when you’re dealing with a hot name like SNAP. Sometimes it pays off, and other times you might get burned.
GoPro Inc. (NASDAQ:GPRO) is the perfect example.
Traders had a couple of opportunities for a swing trade when GoPro shares first hit the market in 2014. GPRO breaking out of its range in early September 2014 was the most “tradable” move. But like many IPOs, anyone looking to hold longer than a few days or weeks had to contend with a massive flameout after the September sprint.
After topping out and sagging for five months, GPRO gave up most of its initial gains and fell right back into its trading range.
Even if you timed the trade perfectly and bought as soon as shares went public, you would have given up most of your early gains had you held onto the stock through that first harrowing drop. And as you’ve probably guessed, GPRO never recovered.
Unless you’re willing and able to trade in and out of an IPO, buying one before it even gets a couple of moving averages under its belt probably isn’t the move for you. Since our trading timeframe looks ahead more than just a few days, we want to wait for an IPO “sweet spot” instead.
Here’s how you play the sweet spot:
Your best bet is to wait for the coil that emerges after the initial hype dies down. Facebook is a great example of how this strategy worked for patient traders. The stock looked like a dud when it went public back in 2012. Once it failed at its highs on its first trading day, everyone complained the offering was overhyped and overpriced.
It took more than a year for Facebook to find its footing. But a picture-perfect sweet spot offered an ideal entry for anyone paying attention. The stock’s trading range compressed like a coiled spring and finally exploded higher in 2013. Once Facebook shares broke out, they never looked back…
For longer-term IPO trades that won’t shake you out of your position or leave you with crippling losses, it’s all about waiting for the sweet spot. No, you won’t be in the stock from its very first day as a public company. But you will save yourself a lot of pain and suffering while the stock finds its legs.
Leave SNAP to the gamblers for now. Remember, most IPOs are just cash grabs for up-and-coming companies and underwriters – especially in trendy sectors and industries. If Snap does offer us a potentially profitable setup once it has some price history under its belt, you’ll be the first to know…
This story originally appeared in the Daily Reckoning