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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Tuesday, August 04, 2020 Headlines

1. Precious metal prices surge, diminish dollar value

2. What happens to shares when stocks split

3. Apple is the model of a successful company

Market Moves

Though stock prices extended gains, Gold prices jumped more than two percent higher and Silver prices exploded six percent by the session's close. There was no obvious news about what drove today's price surge, so that leaves chart watchers to assume the usual suspect: the influence of the U.S. Dollar's decline. The impact of this trend over the last few months is unmistakable. Investors who held their capital in money market funds or cash lost ground compared to those who held metals.

The chart below depicts the falling value of the U.S. Dollar (DXY) and the relative value of State Street's Gold index fund (GLD) if they were both purchased with iShares' Silver Trust ETF (SLV). If Silver were the base currency everyone used, then gold and the dollar would have lost one-third to one-half of their purchasing power to it in just the last four months. The silver lining to this move, so to speak, is that if metals are declining in price because of weakness in the underlying currency, then that influence tends to make stocks more expensive. That is why the market usually rarely crashes as metals are going higher.

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What Happens to Shares When Stocks Split

During strong upward trends in the stock market, a stock like Apple (AAPL) is highly correlated with the movement of market indexes. Which means that there is greater than a 65 percent chance on any given trading day that the stock will close higher than it opened. Since AAPL shares are scheduled to split on August 24th, some investors and chart watchers may justifiably wonder what happens in the pattern of a stock's price when the company announces a split.

While there is no perfect statistical representation for when and how it happens, certain market dynamics tend to be at play. The chart below points out three particular phases. The first occurs between the announcement of the split and the execution of the split, and it tends to play out as positive in the share price. The second occurs directly after the execution of the split as those investors or traders who were hoping for a gain from the announcement now take their profits. The third phase is that the stock's price pattern resumes its upward trend. In between the second and third phase there is considerable uncertainty.

This chart provides a template for what to expect. If prices do not move according to these expectations, then it informs investors that something is brewing within the group of portfolio managers that buy and hold shares. So far, AAPL's price action has been following this template, just as it did five years ago.

Understanding Stock Splits

How to Profit From Stock Splits and Buybacks

Apple is the Model of a Successful Company

The chart below gives a quick look at how the template above played out on AAPL shares the last time the company announced and executed a stock split. The pattern plays out quite recognizably as the split announces (1), followed by a rise in share price. The pattern continues on the day the split occurs (2) is followed by selling. These could be traders taking profit or investors trimming their share count. It doesn't last long and is followed by a volatile period of uncertainty. Eventually (3) the upward trend resumes as both the market and AAPL shares continue higher in the following year.

The Bottom Line

Stocks rose but precious metals surged higher as the dollar continues its decline. That same dynamic will likely help stocks rise. Stocks like AAPL that undergo a split during such times typically follow a pattern that investors may be able to benefit from if they know how to watch it.