Real Money Trading - Extremely Bullish
A reliable 'Real Money" indicator is at its most positive reading in more than a year
Traders’ mental states certainly have a real effect on market action. Panicky thoughts can lead many people to sell first and ask questions like, “What are my shares really worth?” later. Indiscriminate dumping can create bargain valuations.
The people running companies are the best positioned to have a true feel for what their shares are truly worth. Unlike the public, they have the information needed to dismiss the worry that sharply lower quotes might be signaling troubled times ahead.
Officers and directors see low prices for what they are: markdowns which offer better value. Late August’s sell-off marked the ninth time during the past year that the Thomson Reuters Insider Sell/Buy ratio went into clearly bullish territory.
Company insiders almost never buy as many shares of their own stock as they sell. That is because most high ranking officials receive regular injections of incentive share bonuses and/or employee stock options.
The Insider Transactions signal is considered bearish when more than 20 shares are sold for each one purchased on the open market. The indicator is deemed bullish whenever less than 12 shares are sold for each one that’s newly bought.
In the week ended Aug. 28, Thomson Reuters reported that the top 20 insider sales and purchases totaled 356,190,479 versus 69,125,074, respectively. Last week’s fundamentally unwarranted panic pushed the sell to buy ratio to just 5.15x, its most favorable reading in more than a year.
Psychological indicators are often contrary in nature. Fear and greed make traders do stupid things with their portfolios. Surveys of investment opinion don’t always reflect actions. People can say anything they like to the survey takers.
Insider buying can only happen, though, when traders are willing to commit real money. That makes it much more reliable.
A quick glance at the charts above confirm that the most recent previous eight ‘bullish’ signals preceded decent percentage gains over the subsequent two to five weeks. That figure would move up to nine out of nine if you are willing to count the 13% rebound from the Aug. 25 nadir to that same week’s finish.
Odds like that, accompanied by the outrageously below-normal insider sell to buy ratio, imply that it is probably safe to go back into the water.
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If you are looking for ideas that might be bargains…
Every issue of Barron's and the Monday edition of the Wall Street Journal details the largest insider transactions.
Here is the BUY list from the latest edition of Barron’s. Those recent purchases ranged in value from a bit over $1 million to more than $11 million. I'd count those as solid votes of confidence.
Without knowing it at the time, I joined two insiders in picking up shares of Mead Johnson Nutrition (MJN, Financial) during last week’s plunge.
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The largest insider sales were, as expected, larger in dollar terms than the purchases. Keep in mind that there are many reasons somebody might sell shares, but there’s only one main reason why people would buy them.
SEC rules require insiders to hold for more than six months from the date of purchase in order to book profits without forfeiting any gains.
I agree with most of the sales listed above, but I do own and continue to like Polo Ralph Lauren (RL).
The insanely overpriced Shake Shack (SHAK, Financial) saw 18 separate insider sales last week for total proceeds of over $50,000,000.
