3 Great Examples of Market Irrationality – TWTR, ZU, FEYE

One of the most important parts of trading is observing unique scenarios and searching for patterns that might repeat themselves. By analyzing the price action intraday, you can observe how the stock reacts to the news the first time around, and then trade it the next time around.

Out of 100s of unique scenarios, a post IPO lockup expiration is one such situation that is seen 3 – 6 months after a company goes public.

From Investopedia, the definition of an IPO lockup,

A contractual caveat referring to a period of time after a company has initially gone public, usually between 90 to 180 days. During these initial days of trading, company insiders or those holding majority stakes in the company are forbidden to sell any of their shares. Once the lock-up period ends, most trading restrictions are removed.

In the stock market, logic rarely pays off. The game of trading is all psychological, and the vast majority of time if the logical response to a situation is result A, then result B often is what takes place.

In the case of a post IPO lockup expiration, with the release of millions of shares immediately becoming available for sale, one would imagine the result would be guaranteed selling, thus short the stock and make money.

What has happened over the past few weeks with three post IPO lockup expirations: TWTR, ZU, and FEYE, serves as a great example of just how unpredictable the market really is.

Twitter’s TWTR lockup expiration

First we have TWTR from May 6th. If you are a tuned in trader to the daily chatter, you knew about this lockup expiration. What took traders by surprise was how significant the response was. Take a look at these charts (intraday from thinkorswim by TD Ameritrade, daily from MarketSmith).

TWTR 050614 1 PH

TWTR 050614 2 1m

TWTR 050614 3 daily

The most logic response took place; the stock tanked! TWTR shed -17.81% on this day. Shorts were rewarded big time.

Note though, this was Twitter, now let’s move onto Zulilly.

Zulily’s (ZU) lockup expiration

Zulily’s lockup expiration was on May 14th. Traders, applying what took place with TWTR, were ready to go and short the stock thinking it was going to tank too.

Well, the early pre-hours trading for ZU started off the same way as TWTR with a steady decline from selling. But when the market opened, instead of crashing further, ZU stock popped, and popped big. Check out these charts.

ZU 051414 2

ZU 051414 1

ZU 051414 3

The stock had a massive bullish engulfment reversal, running from under $29 to an intraday high above $36! The stock finished the session with solid gains of +9.31%.

Shorts who were betting on a decline got squeezed hard.

FireEye’s (FEYE) lockup expiration

Last but not least we have FireEye (FEYE) which just this week saw shares from its secondary offering lockup period expire.

So the first post IPO lockup expiration, TWTR, did the most logic thing one could imagine, it tanked. The second expiration, ZU, started off like TWTR but fried shorts as it surged higher after the open. What’s the take away for next time? Wait for the opening bell and follow the trend right?

WRONG. Take a look at this roller coaster ride…

FEYE intraday

FEYE daily

I’ll be honest, I was burned here, hard. I got ripped both ways, short then long. Luckily I cut my losses short when the trend changed, then ignored the stock for the rest of the day. Another day and another lesson from the market.

The Market is Irrational

In summary: TWTR down -20%, ZU up 10%, FEYE up 2% and hardly eventful. Three post IPO lockup expirations, and three completely different outcomes.

The takeaway is a simple reminder that the market is irrational. It will bite you in the ass the second you feel you have the upper hand. Cut your losses short and make sure to wear a seatbelt.

Stay frosty (sharp) out there!

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