jhg,
I did get one thing wrong, and that is that the first day the institutional buyers can get in is actually Tuesday, since PWER gets added effective Monday, after the close. However, buying can begin Monday after the close by means of MOC ("Market-on-Close") orders as well.
biz.yahoo.com
I suppose there will be a lot of momentum buying during the regular session, as well as unusually heavy activity in the after hours session on Monday, but most of the buying will occur Tuesday.
I too was holding BRCM and JDSU when they were added to the S&P. As you say, JDSU did not react the same as the others, and began selling off shortly afterward. I think the reason for this relates to the amount of buying pressure on JDSU (relative to the float and the average daily volume), which was not at all the same as with BRCM. Also, however, you have to factor in the effect of momentum traders trying to capitalize on an opportunity. With JDSU, at the time the addition was announced, the average daily volume was about 20 million shares. From the date of the announcement (after the close on 7/19) until the actual inclusion (7/26), there were four trading sessions, during which time a total of 250 million shares were traded. This amounts to approximately 170 million shares in excess of the amount of shares which would normally have traded were it not for the inclusion. So, I think you can conclude that most of this activity was momentum traders. Now on the day of the inclusion, the buying pressure was much less than this amount----75 million shares, or only 44% of the 170 million (95 million shares traded, but normally about 20 million shares would have traded, so this was subtracted from the total)----so the momentum players who were then selling were able to easily overwhelm the buying pressure exerted by the institutions.
askresearch.com
chart.yahoo.com
Let's face it, the primary determinant of stock price in the open cry market system is buying pressure relative to selling pressure, which is certainly not to say that these cannot be manipulated (they are, I realize, every day). But, I see the degree of buying pressure with PWER to be more like BRCM than JDSU, although I don't expect the same spectacular rise with PWER that we had with BRCM. Partly this has to do with the fact that the only days momentum traders could get into this game would be Friday and Monday, and Friday's volume, which is largely due to momentum traders, is not enough to overwhelm the buying pressure which will occur at the close on Monday, unless Monday's volume is a great deal more than Friday's. I don't think this will occur. I think Monday's volume will be roughly the same as Friday's, but the buying pressure at the close on Monday going into Tuesday I estimate will be roughly twice this much, perhaps a bit less (assuming Monday's volume is about the same as Friday's).
I would be surprised if PWER closed on Tuesday at less than 80, and I suspect it will be more like 90. For one thing, those making market in the stock will have every incentive to drive the price up on Monday particularly, and also on Tuesday, as you'll see from the links below. And, of course, they are very adept at doing just that, which is why they make as much money as they do for themselves and their firms (one former MM estimates that the average MM doubles his position every year, and you can be sure that those making market in PWER will be among the best in the firm).
As far as when to sell, I'm not sure. Probably most of the volume in excess of normal volume today and Monday is due to momentum traders and daytraders playing the S&P scalp game. So, the majority of these will become sellers on Tuesday and Wednesday. But, looking at the volume from today, their numbers will not likely be enough to exert selling pressure sufficient to overcome much greater buying pressure from the institutional investors, so I don't anticipate a selloff on Tuesday. After that, I couldn't say. Sure, there'll be some profit taking, but exactly when this occurs and to what extent is what will determine if there is a selloff. If the momentum players who ran it up today (about 2.5 million; average daily volume is about 2.5 million, and Friday's volume was twice that) and Monday exceed buying pressure on Tuesday and all wait until Wednesday and sell, then there will likely be a correction. If volume on Monday is similar to Friday, then there will be selling pressure of no more than 5 million shares, which I think will be less than the buying pressure on Tuesday.
As for me, I have a long-term outlook on PWER, and with the shares I own I plan to hold through whatever happens. But I also have open call positions (November 65), which I plan to close out before the end of the session on Tuesday. My reasoning is that I'm pretty confident that Tuesday will be a big day, but I am not nearly as confident about Wednesday. And, as the saying goes, a bird in the hand......... Depending on how PWER opens on Monday, I may try to add another call position, either at the money or at the first strike out of the money. If it gaps way up, I'll probably leave it alone, or at least watch it for the first half hour. And that position, if I buy, I'll plan to close out Tuesday afternoon at the latest.
Beyond that, I may again trade the stock (or calls) going into earnings, but that depends on how it trades. If it ramps up strongly going into earnings, then I won't hold through earnings. But if not, that is if it trades more or less sideways, I will probably hold through earnings. My reasoning here is that a strong ramp up going into earnings indicates most probably that a very strong report is already factored in, and the actual report cannot therefore cause a further rise in the stock, and will very likely cause a selloff instead. OTOH, an unconvincing ramp or sideways move going into earnings, followed by a solid report, will most likely cause a more extended ramping up thereafter, at least for a couple of weeks.
Here's a very interesting analysis of stocks that were added to the S&P, and how they performed thereafter:
biz.yahoo.com
This analysis is, I believe, consistent with my rationale.
And, here's a story regarding how companies get included or excluded from the S&P:
biz.yahoo.com
And still more, including an interesting little discussion of the "ramping the close" tactic on S&P additions, and why it occurs:
thestreet.com
Hope this helps.
As always, JMVHO..............
Walkingshadow |
