INDICATORS
Basic Supply And Demand
S&P 500 Float Changes
by James Kellndorfer
Generally, mathematical formulas are created in an effort to devise some new indicator that demonstrates a pattern, but sometimes patterns appear unexpectedly when you examine the underlying mechanism. For this article, I conducted a simple survey of the Standard & Poor's 500 to evaluate the basic law of supply and demand found in any introductory economics course. I initiated this survey to test the theories of basic economics and to discover if any patterns emerged.Before applying indicators to securities, it may be worth your while to identify stocks that behave logically. Here's how you can apply the rules of Economics 101 to find the right stocks.
This survey was prompted by Standard & Poor's announcement that the company will be changing its methodology in calculating its indexes. Starting this spring, the computation of the S&P 500 will shift to using a company's float rather than the number of shares outstanding.
CHANGES IN FLOAT
Simply, I collated those stocks with the largest changes in their float to tabulate the results. No effort was made to subject this survey to the rigors of a scientific study and therefore no statistical relevance could be determined. After I tabulated the results, three groups emerged: companies whose float increased without a stock split (nonsplit group); companies whose float increased as a result of a stock split; and those companies in which the float decreased.
A company's float represents the number of shares available to the investing public. In case you weren't aware of this, a company with a million shares doesn't necessarily mean that all of its shares are available for trading. The company may own some of the shares through previous stock repurchases (known as stock buybacks). Or the company may have given away shares in the form of stock options as incentives to entice employees. Plus, a company may have even reissued stock through a secondary offering. This gets complicated in today's world of finance, but the fact is the float represents the net result of all of these transactions. This quantity was chosen because it easily summarizes all of the changes that a company makes to its stock.
DEMAND VS. SUPPLY
Figures 1 and 2 show the component stocks in the Standard & Poor's 500 index that made the largest increases and decreases to the number of shares available. The prices shown represent adjusted closing prices so that dividends and stock splits are reflected in the price. These prices represent the total return an investor would have received. In addition, it seemed fitting to compare May 2004 to May 2003, since both were strong advancing months.
...Continued in the January issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the January 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
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