By CCN Markets: The stock market is in the silly season when IPOs of companies that have no history of profits are soaring. The last time the stock market saw this behavior was when the dot-com bubble burst in 2000.
Frothy IPOs aren’t the only reason for concern. The dot-com bubble stock market was the most expensive market in history. Today, the stock market is at its third most expensive valuation in history.
You Can’t Ignore This Sign of a Stock Market Top
Why are frothy IPOs a sign of a market top?
As valuations get stretched in favorite existing names, investors look elsewhere for big returns in the stock market. All it takes is a single IPO to explode out of the gate, and that starts the media hype machine.
Institutions and hedge funds all want their quarterly numbers to look good, so they jump on the bandwagon; demand pushes these stocks higher.
The danger occurs when the IPOs that come to market are companies that not only are not making a profit but actually have massive losses from year-to-year. That is indicative of low-quality equity hitting the stock market. If investors are gambling their money on garbage, it means they can’t find anywhere better to put the money. Hence, we get a sign of a market top.
Uber and Lyft Shouldn’t Have Gone Public
There have been no fewer than six IPOs in the past few weeks that are indicative of a major top, and two of them didn’t do very well when they began trading. Uber and Lyft hit the IPO market with a thud.
Uber had a billion dollar loss on the books,