Grand Opening of Alibaba Group Taiwan Branch. (Photo credit: Wikipedia)
Alibaba's IPO on September 21 raised a record $25 billion. Of course, this was just another event in the bull market that's persisted for quite some time now. Unfortunately, the Dow Jones Industrial Average took a triple-digit loss the following Monday. Even the Nasdaq declined more than one percent. What if Alibaba's IPO signaled a top to the stock market for the foreseeable future?
Many advisers have pointed out that most market tops included a high-profile event, such as Alibaba's IPO. Of course, such events have prompted investors to overcome their own skepticism concerning market conditions. This IPO created hundreds of Chinese millionaires after all. In the past, many commentators have suggested the bull market was coming to a halt. It hasn't happened yet, but now's as good a time as ever.
A handful of developments have proven disturbing lately. Stocks have been extremely resilient for an extended period of time. At some point, the market has to come back down to Earth. The excessive levels of bullishness cannot be sustained indefinitely. Likewise, the Russell 2000 index is incredibly overvalued at the moment, which is problematic. Highs are outpacing lows in the market, and that's now how the system is sustained.
Weekliy highs and lows for Russell 2000 stocks keep coming and going. Therefore, divergence is at an all-time high level right now in the index. Investors are focusing upon a small number of large-cap stocks and too much on secondary stocks. A decline of 13 to 18% could occur among larger indexes. A major drop of 20 to 30% could occur with secondary stocks, though.
It remains to be seen what happens with the stock markets. In the end, the bull market has to end at some point or another. When the decline eventually comes, it's going to hit investors harder than they realize. Perhaps Alibaba's IPO is the last bit of good news before the decline.