As long as demand exceeds supply then prices should be able to keep going up. Of course eventually there comes a point where demand wanes for whatever reason which by itself is a drag on prices and if more supply continues to be issued, like in the early 2000’s, then prices are likely to fall meaningfully.
Another building block of understanding of the IPO market is that companies prefer to sell at a high valuation not a low valuation. According to Seeking Alpha, there were 32 IPOs in 2008 and 63 in 2009 compared the 42 that listed in the first two months of this year.
The IPO bubble of 2000 happened in 2000, the next time there is a huge market decline it won’t be the same as the tech wreck or the financial crisis of 2008 it will be something else but assessing IPO enthusiasm can be useful nonetheless.
At any given moment there is a list of bullish factors supporting the market and a list of bearish factors confronting the market. When the IPO market is subdued it serves as a bullish factor whereas a hot IPO market serves as a bearish factor. There are no absolutes but enthusiasm for IPOs comes closer to the end than to the beginning of a bull market.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.