|Why we are not at the market peak and how to identify it|
Over an 18 year period, 784 companies were listed on Singapore's stock exchange and this it not including those that were listed via a reverse-takeover. During this period, except for 2004 & 2005, whenever there is above average number of IPOs, the market will subsequently enter into a bear market (see charts below).
On a yearly basis, this number is highly variable. On a monthly basis, the indicator of a market peak seems to be 11 IPOs, with a bear market following 6 months after. Using 10 IPOs as an indicator will create several false alarms.
|(yellow line is the STI value for the same year's January, green line is the same year's December)|
2004 and 2005 were exceptional years because it was during this period that SGX aggressively courted Chinese companies (S-Chips) to list here.
I believe that an above-average number of IPO is good indicator of a bull market that has reached its peak, or what some call a late-bull. IPOs are usually issued under "favourable" market conditions as shareholders of the company being taken public wants to maximise gains. There will be a number of IPOs issued in less than ideal conditions but their investment bankers may decide to use share placements to limit the downside. Therefore, when an above-average number of companies decide to go public at about the same time, it indicates excessive optimism or market euphoria.
If based on past performance, we consider this late-bull market indicator reliable, then we are have yet reached a market peak, suggesting more upside ahead. We were close to that point in July 2013, when 9 IPOs were launched. The STI however remains on a slow uptrend, as we try to overcome the proverbial wall of worry.
For those who find this indicator interesting or useful, the original idea was from Kenneth Fisher. There are two time-consuming ways which this indicator can be improved. Firstly, you can try to count/sum the dollar amount of shares that were floated to the public, including those being placed privately.
The second way is to then deduct the amount of shares floated to the public by the amount of shares taken private using cash (i.e. Keppel Corp and Keppel Land). This is because cash is returned to the public, which will then feed demand for other listed companies, thereby sustaining a bull market.
If you do find the time to do increase the indicator's reliability, do email me and let me know. Meanwhile, do share this post as well as give me the due credit. I spent the first day of the Lunar New Year writing it!
Gong Xi Fa Cai!