Stock splits are one of the most powerful stock-moving mechanisms. They became rather sparse when the market bubble burst, but when the DOW and NASDAQ moves much higher, more splits are announced.
Many analysts say that stock splits don’t mean anything. BALONEY! What they mean is that the “values stay the same.” That is true. For instance, if you own 100 shares of XYZ at 100 dollars per share and the company does a 2-for-1 split, the next day you will have 200 shares at 50 dollars per share. The “value” is the same because you had 100 X100 which equals 10,000 and now you have 200 X 50 which equals 10,000.
But the analysts don’t take into account the profound psychological element of a stock split. That is the part that analysts cannot measure and therefore rarely mention. At InvestYourself, however, we understand the power of the stock split and bring winning split plays to you every week.
When a split is announced, you often see that stock rocket up on the news. More times than not it falls back after a few days and wanders around fairly aimlessly for a while. Many people call this the “flat’ period or “dormant” phase.
Then something interesting takes place. A good company’s stock will begin a rally about 10 days to two weeks before the date of the actual split execution. Why is that? Remember when the split was announced the stock popped and then fell back, often to BELOW where it was when they announced the split? On that first run-up, VOLUME came into the stock. The news was exciting, and tons of shares were purchased in a short period of time.
As the split execution nears, buying volume starts picking up and the share price rises. We call this the beginning of the “split run.” Why does volume increase? For number of reasons, but the main one is the excitement returns to the stock. Some people want to own that stock before the “date of record” and buy into it for any dividends that might be disbursed. Others want it because they know they will have twice as much stock after the split.
We buy it because history shows that more times than not a great company will indeed run into its split! If you look at hundreds of charts from hundreds of companies you will see the pattern over and over. Unless the market is very weak, the stock chart will show a definite move to the upside right before the split execution.
Sometimes a split runner will run right up to the execution day and other times it sells off ahead of the execution. With this in mind, you should consider taking out your profits the day before the execution day. What do you do with a runner with huge momentum that looks like it could get more the next day? Use your stop loss to lock in profits without too much worry of it reversing and falling
Naturally there is never a rule that works every time, but for the most part getting in about three weeks (15 trading days) before a split executes and selling out the day before or the morning of the split still has a winning rate of about 80%. Those are good odds in any venture.
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