The games stock splits can play on you
Abraham George Macro View
The Dow changed it colors a bit yesterday and traded with its new constituents. It took on new participants and dropped some. Salesforce, Amgen and Honeywell became part of the 30 while Exxon Mobil, Pfizer and Raytheon were shown the door. This was largely motivated by Apple’s stock split.
A stock split is when a public company gives more shares to existing shareholders, while cutting the price of each share so the total value of those holdings doesn’t change. Yesterday stocks for both Apple ( 4-1) and Tesla ( 5-1) got into effect but remember Tesla is not in the Dow. It is just trying to get into the S&P 500. A 4-1 stock split for Apple means shareholders get 4 shares for every one they currently have , but the price will drop from 520 ( about last price ) to 130.
Why is it such a big deal. ? Actually stock splits have no bearing on a company’s value, the same way cutting a pizza into 16 slices instead of eight doesn’t give you more pizza. But splits allow more accessibility to the instrument. Since the announcement in late July Apple’s stock is up 30 % and Tesla has jumped more than 60 % after its announcement on August 11.
There is another major reason why Apple and Tesla have rallied which is not that much talked by the general media. Apple and Tesla are also one of the heavily shorted stocks by the skeptics. When someone sells a stock that he doesn’t own ( short ), he then has to borrow from someone who owns it so he can make delivery. He promises to deliver an identical type of stock from whom he borrowed. When the stock splits it messes up life for the short seller and often they have to go into various side negotiations that are equivalent of a short squeeze to buy back the stock, changing it for stock that will be due after the split is effective. So in short stock splits can have a serious upward momentum, particularly if the stock is heavily shorted. Now to markets.
Equities
On last Friday the S&P 500 rallied to 3509.73 but yesterday it rallied to 3510.71 intraday making a marginal high but we are not sure if it can make up to the channel high we mentioned in yesterday’s report at 3540.
In the S&P 500 72% of the stocks comprising the index closed down on the day. Small cap indexes and secondary stock indexes all closed lower too. The Nasdaq ended the day higher as Apple and Tesla soared on account of the split coming into play.
What we learned is that the magic or trickery is when you take a $5 bill and split into 5 one dollar bills, it’s worth much more. This all points to a multi- year high in optimism indicating a very high level of risk for market bulls. The VIX ( CBOE volatility index ) is also diverging significantly from price indicating a breakdown in prices can be closer.
Bonds
Nothing special to add on bonds. Watch for a break below 174. If it happens the momentum to the downside should gather steam.
Euro
The Euro continues to frustrate us on the top side. Only a break above 1.1966 will force us to rethink or abandon our view.
Gold
As the dollar moved lower gold hardly moved. It is important gold starts moving lower soon. A move above the Aug 18 high will complicate the structure. So coming days price action is very important.