When there are suddenly second thoughts in this market powered by so much blind and crazy exuberance, the entire foundation begins to wobble.
By Wolf Richter for WOLF STREET.
The Renaissance IPO ETF [IPO] dropped 4.7% on Wednesday, to $64.65, down 16.1% from the intraday high on February 12. This comes after a blistering 1999-style blow-through-the-roof exuberance rally of 252% from the March 2020 low to the top of the spike on February 12. From the pre-Pandemic closing high on February 20, 2020, to the closing high on February 12, 2021, the ETF surged 117% (stock data via Ycharts):
The ETF tracks the Renaissance IPO index, which reflects the top 80% of companies by capitalization that went public over the past two years. After two years, the stocks are removed from the index. The index caps a company’s weight in the index at 10%. The top five holdings, accounting for 34% of the total index, are currently (weight in parentheses):
- Uber (9/8%)
- Zoom Video (9.1%)
- CrowdStrike (8.2%)
- Pinterest (7.9%)
- Peloton (7.3%)
What is interesting here – in addition to the sudden air pocket underneath these highflying stocks – is the index’s relationship to the S&P 500 Index over the past few years, and how that suddenly changed in the spring, and what the current drop in these highflying IPO stocks might indicate about the S&P 500 Index.
The chart below shows both the IPO ETF and the S&P 500 Index as percentage change from March 2016. For the first four of those five years, the IPO index outperformed the S&P 500 during the Good Times and fell more sharply during the sell-offs, to end up on par with the S&P 500, which makes sense, given the precarious and speculative nature of IPO stocks.
What the chart also shows is that the big sell-offs in the S&P 500 in late 2018 and in February-March 2020 were accompanied by plunges in the IPO ETF, which dropped hard in the early stages of the selloff, foreshadowing in a way the drops of the S&P 500 (data via Ycharts):
Another example of this 1999-style exuberance popping in plain sight is the ARK Innovation ETF [ARKK], which dropped 6.3% on Wednesday and is down 20.1% since February 12.
The components of ARKK are companies that ARK identified as offering ‘‘disruptive innovation’’ that “potentially changes the way the world works.” The top five world-changers in the ETF, accounting for 30.5% of the total ETF, are:
- Tesla (10.1%)
- Square (6.0%)
- Roku (5.4%)
- Teladoc Health Inc (5.3%)
- Spotify (3.7%)
From the March low to the peak of the spike, ARKK had skyrocketed by 358%, or by $120. So now it has given up $31.50 or over one-quarter of those gains. The biggest culprit, in terms of weight, is Tesla, whose shares have plunged 26% from the January 26 closing high ($883) to $653. During the February-March crash, ARKK plunged 40%. So now, there is just a minor dip in the S&P 500, and ARKK has plunged 20% already:
When funds that track the most world-changing disruptor highfliers that had skyrocketed over the past 11 months by several hundred percent suddenly swoon, it shows that there is a change in sentiment. People are suddenly eager to sell those stocks, while others are more reluctant to buy them at current prices, and for sellers to be able to sell, prices have to drop further to bring out the buyers. It’s a sign that blind and crazy exuberance is becoming a tad less exuberant.
But the whole market has been powered by blind crazy exuberance, with market participants engaging in huge and highly leveraged risks. So when blind and crazy exuberance becomes less exuberant, the very foundation of the entire market begins to wobble.
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