When you were a kid, did you ever take a piece of paper and rip it into 10 pieces because you were just that bored? And if you did, don’t you wish you had so much free time on your hands in the present that you were just that bored? In any case, what did you get when you ripped that piece of paper into 10 smaller pieces? If you said ’10 smaller pieces of paper,” you get a gold star. So, what do you get when you split a stock 10 for 1? If you said, “10 shares for each share held,” you’ll need to give me your gold star back. Particularly in a bull market, the math does not hold. I give you the most recent example out there. Yesterday, BIDU’s 10-1 stock split became effective on the market open post Tuesday’s close of 71.42. In yesterday’s NASDAQ, a 2%-3% rally would have been normal. However, BIDU actually traded ahead almost 10% at one point yesterday. Why does this happen (particularly in bull market environments)? It’s almost nonsensical, but the reason is actually common sense. Most smaller investors (and some mutual funds) only like to buy lower-priced stocks. They won’t touch a GOOG at 500, for instance but they have no problem buying SIRI at 1. The thought process is as such: “I can’t buy as many shares of GOOG as I can of SIRI.” Strictly hypothetical, but if the prospects for GOOG’s business call for 100% growth whereas SIRI’s prospects call for a 25% decline in business over the next three years, wouldn’t it be more likely that the share price of GOOG would double than the likelihood that SIRI has an explosive upside move? No matter though when it comes to stock splits. BIDU at 71 with 10 times as many shares outstanding is the exact same as BIDU at 710 with 1/10% the shares. However, John and Jane Investor suddenly think that $7,000 thrown into the BIDU pot for 100 shares may be a good idea (even though it’s the same thing as if they’d bought 10 shares at 700) if the stock price doubled- because they’d double their money from 700 to 1400 just as easily as from 70 to 140. Ask Warren Buffett’s Berkshire A shareholders if stock splits matter. With this in mind, again in a rising tide, it gives some speculative players an incentive to buy shares because they appear cheaper- even if they aren’t. For day traders, there are three main ways to play this. My favorite way is to offer the stock way above market in the very early pre-hours session. For instance, at 6:30AM ET yesterday, I had an offer to on BIDU at 80 just in case somebody came in and did not do homework. Second, I love the unchanged play. On good market days, if stocks like BIDU cannot hold up, they are great shorts thru unchanged typically and vice versa. Finally, on strong market days, a stock like BIDU will usually gap higher and then come in a little. But if it gets back to where it opened, it’s usually a buy. So, be aware of major stock splits as such knowledge can definitely enhance your trading.
Markets overnight were higher throughout the world with markets up 1% in Hong Kong, 2.2% in Tokyo although more muted in Europe with London up slightly and Frankfurt up 0.7%. Notably, oil and gold are both weaker with the euro below 1.26. Futures are slightly weaker as there is a tug-of-war between CSCO and commodity weakness versus trapped shorts and momentum players believing in the EU plan. Today looks to be relatively quiet (when compared to the last few days) with trading on both sides of unchanged albeit with an upside bias based on broad sector strength. The bias should remain to the upside barring a dramatic move in the euro.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
WFMI- good earnings
URS- good earnings
SY- SAP buying out company for $65/ share
DECK, HLF, CLNE, CMCSA- featured on “Mad Money” last night
NCS- closed near a high
MBLX- closed near a high after receiving FDA clearance for Telles project
BIDU- closed near a high after announcing a stock split
IBM- closed near a high after issuing positive financial guidance
AMZN- closed near a high
GS- closed near a high
FCX- closed near a high
MEE- closed near a high
CAM- closed near a high
INFA- closed near a high
NFLX- closed near a high
CREE- closed near a high
CTRP- closed near a high
WLP-closed near a high
GIL- decent earnings
X- closed near a high and upgraded by Goldman Sachs
Bad-The following stocks have bad news and/or a weak technical pattern
CSCO- poor earnings
DRYS- poor earnings
AIG- closed near a low
TMH- closed near a low after posting poor earnings
KSS- poor earnings
Earnings:
THURS MAY 13 BEFORE
ACXM AMSC GIL
KSS URBN VIT
WEN
THURS MAY 13 AFTER
ALKS CA DAR
JWN NVDA
Good luck today.
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner
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