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Monday, August 31, 2020
Action Insight Daily Report 9-1-20
Through the Roof
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Monday, August 31, 2020 Headlines 1. Nasdaq punches higher on stock split enthusiasm [REMINDER: NEW READER SURVEY: If you haven't already taken our investing survey please do. You could win a free Investopedia Academy course. We're surveying our U.S based readers to gauge your sentiment and see what moves, if any, you have been making with your money given the market recovery, and current economic conditions. We'll share the results, as always, and we thank you for your time and participation.] Market Moves Investors put the pedal to the floor as Tesla (TSLA) and Apple (AAPL) opened for trading at new lower prices. From the perspective of these companies' investor relations departments, the splits are a massive success right from the green flag.
The action in these stocks led the Nasdaq 100 (NDX) to close .85% higher today. The S&P 500 (SPX) closed −0.22% lower but is still trending upward, while the CBOE Volatility Index (VIX) continued to rise as well.
The chart below compares the price action on both TSLA and AAPL. Notice how both hit dramatic new highs, despite the mounting concern that both companies may have outpaced their fundamental values. Stocks typically sell off after a split, and that selloff may yet be coming, but for now today's strongly bullish close on these stocks suggests just how committed investors feel to their favorite tech stocks. 
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Volatility Warning Bells Get Louder Despite the enthusiasm for stock ownership demonstrated by investors of stock-splitting tech companies, these same investors remain cautious about bidding up the price of the S&P 500 index. Option purchases are on the rise. This means the VIX is tracking a greater degree of demand, and is therefore trending higher, even though SPX is doing the same (see chart below).
This is usually a bearish signal. The last time it looked so divergent was about a month before the pandemic made the markets panic. At that time investors wanted something to hedge their positions, but this time it doesn't seem to be playing out the same way. While some analysts believe that fears of a messy election ahead are stoking the demand for put options, at least one source thinks that it is rampant speculators, driving up the price of call options, responsible for the added volatility. Either way it is a serious warning signal for chart watchers to contemplate.  Candidates for the Next Split The immediate impact of the stock split led to an increase of market cap for the two companies previously mentioned, for no other reason than that these companies have cheaper priced shares today. It follows that if other companies think they can benefit from this tactic, then it will spread. Perhaps, just as it did in the late 1990s, split mania may take the markets by storm in the months to come.
If so, the chart below shows three stocks whose prices are so high it would prompt investors to wonder if they would also consider a split. However, both Amazon (AMZN) and Alphabet (GOOGL) representatives have historically opined their desire to not split the stock. Nvidia (NVDA) officers have not stated such reluctance.  The Bottom Line Tesla and Apple continued to rise even after their splits, showing strong commitment from investors. The SPX is on the uptrend even after closing lower today, but in the past week, so is the VIX. This could be a warning signal to investors. The successful execution of the stock splits by Tesla and Apple may prompt other companies to move towards splitting their own stocks in the near future.
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