Much ado about tweeting, but S&P weak into 2014

By Danny Riley

Today is Twitter’s NYSE big day. When the company raised its public offering price to between $23 and $25, the value of the company jumped to $15.5 billion, and it could end up the largest IPO by an Internet company in the U.S. and the largest IPO since Facebook.

Twitter, Inc.

45.89  19.89 (+76.50%)

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The S&P (ESZ13:CME) has been up so much one has to wonder what the catalyst could be to knock it back down. We all know that when the taper drums start beating again the S&P will get soft. We also know the debt ceiling and another government shutdown won’t help the bulls’ cause either.

While the market may still be going up now, we don’t expect it to remain that way in the beginning of 2014. Several weeks ago I asked, with the S&P up 26% from this time last year, if the Twitter IPO could mark a short-term top in the markets. With so much expectation built in, what if the stock rallies too much and then sells off on the first day?

The Street has such high expectations it’s not a question of whether the stock go up, it’s will it go up too much? I remember when Google [GOOG] went public and I remember the catastrophe the Nasdaq trading glitch caused during the Facebook [FB] IPO and how the stock sold off. They say the Twitter IPO could fall in between Google and Facebook for the size of the public offering.

As you can see by the chart, Twitter’s IPO could come in above the $1.9 billion Google earned. We use Twitter and have nearly 16,000 followers but I am just not sure where the company will be in, say, 10 or 15 years. Will people still be tweeting? Is it a fad or is it for real? Our guess is that after the IPO, the stock sells off and that it will take a full year or more to get a real feeling for the direction of the company. There is an old saying: “When everyone’s buying it’s time to start selling.” Today that saying will be put to the test.

Our view: The markets are going to be preoccupied by Twitter today. We could be 100% wrong, the IPO goes great and the S&P rallies again. The overall price action in the S&P has been “back and filling” and making higher lows and could easily go ripping higher, but it will still have to face Friday’s jobs numbers and we just don’t think the S&P is going to like that very much. Additionally, next week is the November options expiration, so we will also have to be looking for the Pit Bull’s Thursday/Friday low before the expiration. Our view is to buy the early weakness and sell rallies.