The normally reliable Thomson Reuters Insider SELL/BUY Ratio:
Failed over the past two weeks.
The real money Insider Sell/Buy ratio turned decidedly bearish in late June right before the DJIA and SPY went on to new all-time records. A week later, insider transactions swung back to a slightly bullish stance. The signal proved faulty once again as all three major indices proceeded to sell off.
Source for 5-day charts: Barron's
Even the best indicators can only provide guidelines. There is no true substitute for basic fundamental analysis to determine what and when to buy and sell.
The run to new highs around Independence Day left few bargains on the shopping list. Many of the best values now reside in retailing, where the mood is bleak on news of weak consumer demand, despite our government’s claims that America is in economic recovery mode.
Barron’s July 14, 2104, cover story highlighted this theme with recommendations that included Bed, Bath and Beyond (BBBY), Staples (SPLS) and Whole Foods Markets (WFM). All three are included in Market Shadows’ Virtual Value portfolio holdings and/or our Market Shadows Put Writing Portfolio.
BBBY showed some noticable pop on Friday, surging in the afternoon on heavy volume that was accompanied by unusual call buying activity in the Aug. 2014, $60 and $62.50 strikes and in its Jan. 2016, $75 call options.
BBBY’s Aug. $60 calls traded more than twice as many contracts (just on July 11th) than the entire previous open interest in that option. That was also the case for the way out-of-the-money Jan. 2016, $75 calls.
The final bid – ask on next month’s $60 calls was $1.45 - $1.51. The $62.50's were attracting bids and asks of $0.62 to $0.72. Break-evens for buyers of those calls would be about $61.50 and $63.15 respectively within the next 34 days.
Note: BBBY had bottomed at $54.96 just days ago, right after the release of its earnings report.
The mid-point of Friday’s final bid-ask spread on the LEAP Jan. 2016, $75 calls implied a move to $77.25 before those call buyers could start making money at expiration. Is it not crazy to think that BBBY could be above $77 over the next 18 months.
BBBY broke above $80 in Dec. 2013, and peaked at $80.82 just months ago.
Even the newly reduced EPS estimates would support $75 - $80 within a year based simply on a return to a normalized valuation.
Disclosure: Long BBBY shares, short BBBY Jan. 2016, puts, long SPLS shares, short SPLS options, short WFM puts
About the author: