Why the Alibaba IPO could be bad for stocks

If a butterfly flapping its wings in China can impact weather around the world it shouldn’t come as any surprise that a $150 billion Chinese IPO can trigger waves of selling in the Nasdaq 100. Bloomberg is out this morning noting that the size of the Alibaba offering is roughly equal to the collective market-cap decline in former high-fliers like Netflix (NFLX) and Facebook (FB).

There’s no such thing as coincidences. Not on Wall Street.

Just because the cause and effect relationship between weakness in growth stocks and big IPOs is real doesn’t mean it’s not all in your head. In the attached video David Lutz of Stifel says high-profile IPOs raise the perceived level of risk in the market. When things go wrong, as was the case with Facebook’s IPO in 2012, things can get ugly.

“In the case of Facebook where a fair amount of (the shares) went to the retail investor when it broke the IPO price you had a big rush to the exit and that’s the big concern,” says Lutz, adding that the negative price action bleeds into the sentiment of other stocks.

Alibaba doesn’t need the cash. The company has nearly 50% profit margins and could have waited to go public for years. Insiders are selling largely because the smart money views the market as at least fully priced. That might not be a clear “top” call for tech stocks as a whole but recent history suggests the market could be bumpy as market adjusts for the bulk of the next tech titan to soak up demand for shares.

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