I have heard from others to always exit a pre-split play before the split date, to be out no later than the pay date--no matter what. Do you ever take this stance as well? (May 16, 2002)
Static approaches to the market usually land you in trouble. We are always looking at the dynamic processes in the market, and playing pre-splits is no different. In an established bull market, the 'typical' split play is to get in before the announcement to get any upside on the bullish news. As we have seen this year, as the economy improves and the leaders make their strong moves, the announcement can drive them higher in a hurry (e.g., LLL, PNRA, PFCB, WSM). The next play is in the two or so weeks ahead of the actual split, where stocks tend to give us a nice move into the actual split. After the split, stocks tend to dip or slump as the additional shares require a lot of buying to move the stock higher. It has to digest those shares and then set up another pattern for a move higher. In that situation, we often take profits before the split effective date if we have a nice run, particularly if we see the topping signs that so often occur during this volatile time after a good run and right before the actual split.
What we have seen in this market this year, however, is different. We have an economy that is recovering. We have a stock market coming off its longest bear market in 28 years. There has been a sea change of leadership, and now we see economically sensitive stocks taking the leadership roles and of course announcing splits. Instead of slumping on the actual split, however, investors are using the 'lower' price to buy more shares. Indeed, we have seen many stocks set up bullish bases moving into the split and then breaking out on the actual split date or shortly thereafter. Why? Investors are focusing on the areas that are working in the recovering economy and market. Economically sensitive stocks are outperforming, and more money just keeps flowing into those stocks even as they split. Thus, they are being driven higher post split. We will still exit if we have had a good run and the stock shows us topping signs as we teach in our seminars, but if we see a solid pattern, we will also hold some positions if it continues to perform well. Indeed, we have often bought into the stock on the split as they have broken out on the split.
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