For the 56th time since 1896, the Dow Jones Industrials have spiced things up – Exxon Mobil Corp. (NYSE: XOM), Pfizer Inc. (NYSE: PFE), and Raytheon Co. (NYSE: RTN) are out, and "new economy," biotech, and tech stocks Salesforce.com Inc. (NYSE: CRM), Amgen Inc. (NASDAQ: AMGN), and Honeywell International Inc. (NYSE: HON) are in.
But for sharp traders, the real story – and the real opportunity – is over on the high-flying NASDAQ Composite.
Sure, the endless string of new record highs is nice, but I'm talking about the stock splits approved by the boards of Apple Inc. (NASDAQ: AAPL) and Tesla Inc. (NASDAQ: TSLA). AAPL and TSLA shares split 4-for-1 and 5-for-1, respectively.
That ignited monster rallies in both stocks and, in short order, long-term bulls will get a beautiful entry point.
The thing is, it's not right now.
Here's What Just Happened
These are two of the most significant stocks splits of the past few years, and here's why: Apple, which has made itself more or less critical to American life, is the world's second most valuable company, tipping the scales at $2.3 trillion.
And at $452 billion, Tesla is the world's most valuable automaker. It's worth more than twice as much as the classic "Big Three" (General Motors, Ford Motor Co., and Fiat Chrysler) combined, and it's twice as valuable as the distant second, the $217 billion Toyota Motor Corp. (NYSE: TM).
These splits are going to echo around the markets and people's portfolios for years to come. And you know what? Stock splits like Apple's and Tesla's are more or less custom-ordered to do just that.
Now, if the idea of a stock split is new to you, here's a simple explanation. It's important to understand the process.
Stock splits have been used over time by companies to make shares more accessible to the everyday investor. When a stock split occurs, keep in mind that the market capitalization of the company remains unchanged. A great way to think about it is that if you have a cake, you cut it into smaller pieces so more people can have cake.
So, for instance, let's say you bought a share of Apple for $500 on Friday – this morning, you probably woke up to four times the amount of shares in your holding. The share price is $125, or 25% of what you paid on Friday – but your total position value is unchanged.
Out in the mainstream, a lot of analysts and big investors point to recent growth in these stocks to push the "you might have missed out by not jumping in pre-split" narrative. Since the splits were announced, Tesla is up more than 66%, and Apple around 35%.
Did the fundamentals improve that much in the meantime? Did we fall asleep and somehow miss a great quarterly report? No.
But retail investors in the grips of "FOMO fever" have piled in, hoping to get in on the splits. That's pushed the stocks to dizzying heights.
Now, provided you have your eyes open, gains are gains, and if you've ridden these stocks higher, hats off to you. Stay alert and protect those profits, though.
And if you have missed out, or you'd simply like to add to your position, the opportunity is coming up fast.
Here's the Right Time to Strike
Now, it is typical to see stocks rally 5% to 8% after a stock split. And that's basically what's happened; there's no denying that Apple and Tesla are on fire. But it's important to ask yourself how long you believe this growth is sustainable.
In my opinion, the blast-the-paint-off-the-walls rally we see right now isn't.
As I said, I think we're seeing a lot of inexperienced traders and investors buying into the hype and FOMO, further pushing the stocks upwards.
And, while I certainly wouldn't sell these stocks, I would take some profit off the table. And I would not chase these stocks during this split-fueled FOMO rally.
Instead, I'm waiting for a classic "big day" for these stocks – I'm talking all-time highs. Once that happens, routine profit-taking means it's just a matter of days before these stocks close on the lows.
Then get ready: Compare the current closing price of the stocks to the closing prices before the split. When the current closing price is, proportionally, sitting near the middle of the range of its pre-split closing levels, that's your green light to add these stocks to your lineup or add to your current position.
The gains on trading these stocks could potentially be even more than buying them outright. If you're one of my Project 303 members, keep your eyes peeled: It's very likely you'll get a S.C.A.N. alert from me with a recommendation.
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About the Author
Andrew Keene, editor of the 1450 Club, Super Options, and Project 303 at Money Map Press, is a globally known trader and a renowned expert on all things options.