Talking Numbers

Is the recent rush of IPOs the sign of a market top?

Is the recent rush of IPOs the sign of a market top?

A slew of IPOs hitting the market has brought the number of initial public offering deals to their highest level for a first-quarter since 2000. And, we all know what happened that year.

Companies like GrubHub, Box, and King Digital are going to join the 41 companies that have gone public in the first three months of this year. And, a total of 91 companies have filed for an IPO this year alone. That's nearly three times as many as last year, according to Renaissance Capital.

And, they're getting good money: $8.5 billion has been raised so far in 2014, 20% more than last year. Those about to go to market are also getting a pretty penny. Food delivery company GrubHub is being valued at $1.72 billion. Online storage company Box is raising $250 million for a company that lost $168.6 million this past year.

(Read: Big Box IPO draws out market's hecklers, and Mark Cuban)

Are all these companies trying to cash out sign of a market top?

Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, believes this is an omen for the Dow Jones Industrial Average.

"All of those IPOs are a sign for a potential top here," says Ross. "It's just part of a growing litany of bearish evidence here for the Dow."

Looking at a one-year chart of the Dow Jones Industrial Average, Ross sees a triangle formation that started over the past several months. "The pattern is non-directional," says Ross. "But we want to trade in the direction of the breakout – or the breakdown which is what I think is coming.

While the market benchmark S&P 500 index has broken its December records in recent weeks, that's not been the case for the Dow.

"The Dow has failed to confirm and that's troublesome," says Ross. He sees a pullback toward the Dow's 200-day moving average, currently around 15,654. The Dow closed Tuesday at 16,367.88.
"I would not be a buyer of the broader market here," says Ross. "In fact, I would be a seller and, if I were an aggressive trader, a short-seller…. I think that the potential for downside is at its highest level in months."

(Read: Is the IPO market in a bubble? What to look for...)

Portfolio manager Chad Morganlander of Stifel's Washington Crossing Advisors disagrees with Ross. While he, too, believes a 4% correction is possible in the short-term due to the Federal Reserve Bank's liquidity program tapering, Morganlander thinks the market will give a total return of between 7% and 8% over the next twelve months.

"We believe that to be the case based of an economic forecast of 3% GDP growth [and] earnings that come in roughly around 8% high than last year," says Morganlander. "We don't think that the S&P or the Dow Jones is very cheap nor is it very expensive at this point. What's going to correlate with the market is earnings. And, we think that going into the second-quarter, third-quarter, and fourth-quarter, earnings are going to start to take off."

To see the full discussion on what's next for the Dow Jones Industrial Average with Ross on the technicals and Morganlander on the fundamentals, watch the video above.

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