NEXT UP ON THE CHOPPING BLOCK: CORPORATE INSIDERS
On August 1st when we were sitting about 13% higher on the S&P 500 I said the following, "We are entering one of those periods where the market is going to become extremely deceptive in its behavior. Contrarian theory will be tested. As will various popular technical indicators. The decline has already managed to pop up on the screen of most technicians as being oversold and overly-bearish. Those who take comfort in such indicators will face pressure in the weeks ahead."
I bring this up because of an article I came across yesterday that told of the fact that insiders at corporations across America are buying their stock at what they consider to be attractive prices following the steep decline we have faced recently. The article from CBSMarketwatch can be found here.
My immediate reaction was that insider buying as an indicator, given current market conditions, will work just as well as oversold indicators or traditional sentiment indicators that technical investors (myself included) rely on a majority of the time. In other words, its useless.
In fact, I will go one step further and say that insider buying is a contrarian indicator of the lack of fear with which this decline has been greeted by the general investment public. While investors will acknowledge that things do seem to be bad in the economy, government and subsequently the markets. The general consensus seems to be that now is a better time to buy for the long-term than sell. Insiders seem to agree.
My experience has shown that during emotionally driven declines that become overwhelmingly violent in behavior, corporate insiders are prone to becoming no better than the average Joe in terms of picking a bottom. You want proof? Here's an exceprt from an article published in Barron's by the same author on October 3, 2008:
Vickers Weekly Insider Report: Bullish. The ratio of insider sales to insider purchases is well below historical norms, which is a bullish omen, according to this newsletter. The bullish level of this ratio results from both an increase in insider buying and a decrease in insider selling, according to Vickers. "Insiders seem to be bucking the trend of investors in general," the newsletter wrote in its latest issue, dated October 6. The service's two model portfolio are, on average, about 93% invested in U.S. stocks.
From the point that Vickers proclaimed that insider buying was a bullish indicator the S&P declined some 30% over the next couple of months.
It would have been wise to fade the insiders in October of 2008. It will be just as wise to fade the insiders in August of 2011. The emotions of the marketplace and the intentions of the markets cannot be gauged irrespective of how well the most hard working insider knows his or her company. The truth of the matter is that the markets are 90% psychology and 10% facts. Those insiders that you see buying this dip hand over fist are investing on the 10% facts, while ignoring the psychological component.
Investing on facts may work during a steady, evenly paced market. However, during periods like the one we are facing at present, investing on facts alone can ruin you. I believe that insiders will wake up to this reality during the weeks and months ahead.
The markets haven't fallen at such a rapid pace simply to accommodate insiders and those investors who feel that buying stock here can be beneficial to their financial health. If only the markets were so accommodating. The fact is that they are anything but.
