[amibroker] Re: Trendlines displaced after split, AmiBroker Email List Archive

This is an interesting discussion. Maybe I can offer a unifying perspective. According to one financial theory (auction market theory), stock markets are dual sided auctions where buyers and sellers determine fair values of stocks through their buying and selling. The current price of a stock reflects all the current actions of all the buyers and sellers at the current time. The market participant actions are based on their perceptions and future expectations for the stock or the underlying company’s prospects. As long as the buyers and sellers expectations stay the same, a stock price tends to fluctuate around its current fair value price. When a stock price is perceived as cheap relative to its current fair value, buyers step in and buy. When a stock price is perceived as expensive, sellers step in and sell. Whenever perceptions change, buyers and sellers will move a stock price until a new fair value price area is found.

So what does all this have to do with a stock split? Well a stock split is an event that can change the perceptions of market participants about a stock (for whatever the reason). There is the mechanical/accounting side of a stock split that does nothing to the total market value of a stock. However a stock split (or more correctly; the announcement of a stock split) does cause many market participants to take notice of the stock and perhaps change their perceptions and future expectations. It’s not a bigger float that brings in more market participants; it’s the changes in perception triggered by the change in float event. Companies that split their stocks are generally perceived as growing companies. A stock split is an event that alerts a company’s growth to current and perhaps additional market participants.

Since a stock split can change market participant perceptions, a stock’s fair value can change because of a stock split. If the perception changes are large enough, then trend lines can also be affected. If the perception changes are not large because they are perhaps already well known and discounted by the market participants, then trend lines may not change. It should also be noted that trend lines are very timeframe dependant. A stock split announcement may change 5 minute timeframe trend lines greatly but not affect a trend line on a yearly chart at all.

I don’t think I’ve said anything about a stock split that was not said in the previous posts, I just restated ideas using the auction market theory as a framework. The framework personally gives me a simplified structure to explain what’s going on in a market or a stock. I know that perceptions can be irrational (especially when they don’t reflect my beliefsJ) and markets can move counter to what I expect. However I do take notice of events (like economic reports and company announcements) because they do cause changes in perceptions and thus change prices. As a trader, that’s what I want… changes in prices.

Regards,

David

From: amibroker@xxxxxxxxxxxxxxx [mailto:amibroker@xxxxxxxxxxxxxxx] On Behalf Of Rakesh Sahgal
Sent: 04/28/2007 5:05 AM
To: amibroker@xxxxxxxxxxxxxxx
Subject: Re: [amibroker] Re: Trendlines displaced after split

Naah I dont understand diltuion too. I guess I am not alone in the arrogance boat ,now am I? :)

Enhanced float brings in newer segments of market participants. Wider market participation means more varied response to developments with respect to the company which is reflected in the price movement of the stock. This is turn will ALWAYS mean differences in price patterns as compared to the time when the float was lower. Wider participation will smoothen price movements to an extent - mucher lower limit down lockdowns or limit up lockdowns. You choose to believe differently , thats your business. I can only state what I have observed over whatever time I have spent in this business.

R

On 4/28/07, Sirbrainfart <sirbrainfart@yahoo.co.uk> wrote:

WRONG!!! (and quite arrogant-sounding)

A "simple" split does nothing to a company's total equity value and therefore nothing to the supply/demand balance. If you divide the share price by four and multiply the number of shares in circulation by the same factor then the market value of the total outstanding equity remains unchanged. It may affect liquidity slightly, but in most cases the average daily volume will just go up by the same factor (i.e. everyone now buys 4 shares for every one they used to buy...net effect, no change)
What a split does is alter the *perceived* value of a company...and perception, as your post proves, is important for marketing purposes. Some people don't feel comfortable buying shares that trade +$100...a $25 share price is often an easier sell.

The same argument also for new stock issue...so called "dilution", which you probably also don't understand. It's what the company *does* (or proposes to do) with the new cash that affects the market value, not the raising of cash itself, since issuing new shares (i.e. increasing the company equity value) has a net balancing effect by the new cash raised. So one side of the balance sheet is countered and netted out by the other. When the cash is spent, or when the company announces how it intends to spend it, is when the market will respond...i.e it will decide if there is good investment or bad.

Anyway, the point is that back-adjusting the price to account for a spilt is a perfectly valid thing to do, since all you are doing is mapping out how the market perceived changes in the *total* market capitalisation over time. The absolute share price is much less relevant than what it actually represents at any given point in time.

Andy

Rakesh Sahgal wrote:

A "simple 4:1" split as you so dismissively refer to it, enhances the a company's equity by a multiple of 4 and also the quantum of float that is moving around in the market, though not necessarily by the same quantum. That my friend, changes the demand-supply dynamics of the company's stock as also the perceptions of the market participants about it. Which I hope you will be kind enough to concede will start impacting the price movements too. So in summation yes a split warrants new trend lines. However if you want to stick to an analysis that was relevant to a situation that existed in the past, and not re-do the analysis in the light of the changed situation, all you have to do is let the old trend lines remain.

R