Why Facebook caused the market faceplant

by Jay Pestrichelli on May 18th, 2012

Here's the formula: start out with a multi-week market sell-off f. Add to that all the hype around the social media giant. Then throw in the massive amount of talking heads that said every social media IPO has taken a beating in the last year. What do you get? A recipe for a disappointing first day for Facebook. By the way, for full disclosure, I bought 50 shares just to be a contrarian to my peers.

However, is that what caused the broad market to have another down day? Many thought that this IPO would be the turning point. That excitement for the markets would be generated and Facebook would spark a bounce, especially in tech, and all would be right in the world for the bulls. But the market once again reacted the exact opposite of what was expected.

There’s no way to know for sure, but I suspect that the disappointing IPO has fueled an entirely new set of bears to jump in. Those that were waiting for a pop from Facebook before shorting, most likely saw the weakness and hammered on it with new positions, not to miss the next round of sell-offs.
Looking at Friday's daily chart of the NASDAQ 100 (NDX) and Facebook (FB), it was evident that FB was dictating what the market was going to do, not the other way around. FB’s first 20 minutes of sellers got their wish as the stock dropped but soon after it bounced and the NDX followed its recovery. But as that failed to have the hyped-up run north, it became evident that this was going to be a disappointing day.

When FB showed promise, so did the market. But in the last hour of trading when it became clear that the underwriters were going to need to step in and prop up the IPO, the NDX had its dropped with no real support in sight.

If today was any evidence of what is to come for FB stock, there should be more expectation of selling pressure, and THAT is what is spooking the markets. Ask yourself this, “If the most hyped IPO of all time can’t garner the unconditional love, then what will? “

But Monday will come and the sun will rise and another day of unpredictable market behavior will set in. Perhaps all those waiting to NOT buy on the IPO day will hop in and prop up the price, but lets face it, the expectations of a run up to 75 or 90 as seen with LinkedIn just doesn’t seem like a reality and the emotional damage is done.


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