WASHINGTON – Investors enjoyed a mostly robust August. Some stock market averages hit all-time highs, surprising many experts. In reaction, we can expect to experience a few down days of profit-taking as we head for the historically treacherous month of September. The Dow Jones Industrials (DJI), at least, decided to show us the way today. That venerable, large-cap index of 30 “industrial” stocks opened down Monday morning some 200 points. Unsurprisingly, this newly rejuggled Dow remains in that range as of 2:30 p.m. ET.
More of the Great Trump Rally II to come? Or another March-style Dow crash?
What does the current pause in the Great Trump Rally II mean for the average investor? Or for investors favoring the large-cap stocks that inhabit the newly rejuggled Dow? (More to come on this.)
It all depends on what transpires once we wrap up this uncommonly robust August.
On one hand, markets could be taking a pause to “digest” the latest, surprisingly robust August gains. On the other, it feels as if this great summer action, a godsend for investors, has somehow ignored the rapidly declining political and structural mood of the country. So we might be staring at a big market hit in September, just to get traders and investors discouraged and pessimistic once again. And, maybe, just maybe, that potential downdraft might rescue those always pessimistic permabears. They persistently remained on the short side during the market’s phenomenal post-March recovery.
It’s largely a guessing game at this point. But we should also keep in mind that trading action this Monday, August 31, 2020 also marks a massive rejuggling of the DJI. This was set in motion by Apple’s (trading symbol: AAPL) decision to split its increasingly expensive shares on a 3-1 basis. Which means that if you held one expensive share of AAPL on Friday, you woke up Monday morning to discover that you now hold four (4) less expensive shares of the company. (3 shares plus you original share.) We discussed this extensively in our Friday column.
Splitsville Monday for Apple shares
In other words, your one share of AAPL on Friday, which was worth ~ $500 or so became four shares today, worth ~$125 apiece before the market opened this morning. Your holdings opened this morning worth about the same as they were on Friday. But you have more of them at an attractive, lower price point. Trading action in AAPL thus far shows that a bunch of eager new investors are now tumbling into the stock. As we write this, Apple’s new, post-split shares are trading close to $130 per share, up over $5 per new share for a gain of 4.07% thus far.
Often, a post-split stock gets hit for a loss when all those neophyte investors who bought the old, more expensive shares before the split thinking, somehow, that their post-split shares will suddenly be x-times more valuable. But they’re not. The new shares are now worth x-times less than the old shares, although you’ll have x-times more of them. In other words, it’s even-Stephen. Which is why a lot of investors who jumped in thinking the stock split was a big deal find out it actually wasn’t, and dump all their new shares out of disappointment. They thought they’d become malefactors of great wealth overnight.
But Apple shares keep rolling
In Apple’s case, however, the stock has been on a recent, massive tear. And instead of tanking Monday morning, it’s continuing its uptrend, likely leading even more investors to bid the new, cheaper shares even higher. So those who bought prior to the split and continue to hold are feeling pretty good right now.
Warning, however: Near-term, we could still see a big dump-a-thon in AAPL some time soon. No stock, not even a highly profitable big-tech stock, can go up forever. So pay attention to your current AAPL holdings. We have a small amount ourselves, and we’re up pretty nicely thus far. So nicely that we wish we’d bought more when AAPL was lower. That said, a profit is a profit. So the next big question is, “When do we sell?” Well, we don’t know. But we’re keeping an eye on this one.
And then, there’s Tesla
Tesla (TSLA) finds itself in the same situation as Apple, except that its share price was considerably higher than Apple’s, pre-split. But post-split, TSLA, like AAPL, is also violating our trade-down rule today, boasting a whopping 10% post-split gain at the moment. We’ve never invested in this dubious company. However, we do mourn the fact that we’ve left a lot of imaginary dollars on the table as a result.
But we still think the day will come when this company’s shares, which seem to live on fumes, meet their comeuppance. The company wouldn’t be viable if it weren’t for Federal subsidies supporting lower prices for its still way-imperfect cars, and this bothers us quite a lot. If it hadn’t bothered us, we’d be typing this column from our villa on the French Riviera. But we’re not. Oh, well…
Rejuggling the Dow to wrap up an amazingly robust August that concludes today
Related to the Apple split, the keepers of the DJI announced last week that they were recalibrating that average, kicking out three older components and adding in three new ones that, allegedly, reflect the current, tech-heavy slant of today’s big-cap stocks.
Out of the rejuggled Dow today: old timers Exxon Mobil (XOM), Pfizer (PFE) and Raytheon Technologies (RTX).
The latter was a fairly recent virtual addition to the Dow, given that RTX currently consists of an older Dow component, defense-oriented company United Technologies. The old UTX, jettisoned a few product lines to link up with Raytheon (another defense company) for the usual real or imagined “synergistic” reasons. They combined names more or less, and thus, were rechristened Raytheon Technologies. But now, that newly merged company has been exiled from the Dow.
What are the new Dow stocks in town?
Replacements in our newly rejuggled Dow? Mega business, sales data and cloud company Salesforce.com (CRM); maturing but still innovative pharma giant Amgen (AMGN); and Honeywell Industries (HON), an aerospace and industrial giant.
This big switcheroo, on top of the Apple and Tesla split-a-thon has likely contributed to today’s mixed bag of a stock market today as well. If nothing else, Dow oriented funds and ETFs, in particular, need to move out the old, bring in the new, and adjust for the splits in all six of these pre- and post-split / Dow adjustment stocks, recalibrating their portfolios to reflect what’s happened. That process actually began late last week, but it continues today.
In other words, we expect a kind of “meh” Monday to close out an otherwise highly successful August. Investors, traders, funds, ETFs and a variety of investment firms have a lot of juggling to do.
Try to remember the Doom of September…
We wish we had a better idea as what September intends to hit us with, given the ongoing Communist riots raging across the US, the media’s massive, continuing misinformation campaign, and a life-or-death national election we’ll soon confront this coming November 3. A pair of CNBC interviewees consulted their crystal balls this morning and came out with two different predictions.
“Gina Sanchez, CEO of Chantico Global, said which stocks outperform next depends on the strength of the recovery.
“‘I’m focusing on a weak recovery and I think in a weak recovery play, you’re looking at something like an American Express or a Walgreens, JPMorgan, things with good fundamentals but should continue to just put one foot in front of the other,’ Sanchez [said].”
On the other hand:
“Craig Johnson, chief market technician at Piper Sandler, is more constructive on the market and sees further upside…
“‘We’re neutral on financials, but I would play JPMorgan [JPM] in here. The stock is starting to make a nice series of higher highs and higher lows, a move above $105 sets the stock back up to go to about $110. So that’s the name we’ll be playing at this point in time,’ Johnson said during the same ‘Trading Nation’ segment.”
Thanks, Craig. We’ve been betting on JPM since the stock bottomed earlier at $92 per share. And we think it goes much higher than $110. But not right away.
After our robust August trading action, Election 2020 promises a wild ride for Mr Market this fall
One thing’s certain. Mr Market and his newly rejuggled Dow will soon serve us a huge batch of big winners and losers, many of whose fates depend on this election. As does the future of the entire country itself. We’ll all want to start hedging against the potentially negative possibilities. We may soon face the biggest-ever onslaught of political headline risk markets have ever endured.
– Headline image: Cartoon by Branco. Reproduced with permission and by arrangement with Legal Insurrection.