Trader’s Narrative

As the market races to the bottom, corporate insiders are racing right along buying with both hands. For the past four weeks, insider activity as monitored by InsiderScore, corporate executives and board members have been in what can only be described as a buying frenzy.

According to InsiderScore, “insiders are more bullish now than at any time since the two weeks immediately following the Black Monday market crash of October 1987“:

Source: InsiderScore.com and SentimenTrader.com

I checked with a similar service that tracks Canadian stocks: Canadian Insider and not surprisingly, the Canadian market is showing a similar pattern of insider buying.

The pattern was especially noticeable for Canadian REITs. And I’m not referring to ESOP where there is a preset schedule. REIT insiders are going out into the market and buying of their own volition. RioCan REIT, which I mentioned a few days ago, had 11,440 units purchased just on November 19th and November 20th, as an example.

The same can’t be said about precious metal stocks. For example, Barrick (ABX) and NovaGold (NG) do not show any buying interest from corporate insiders. If anything, there is a slight bias of selling. Which means that while insiders as a group are very bullish, they are still being selective. The k-ratio fell to 0.23 and has rebounded with Friday’s move in gold. That’s getting close to an attractive level for gold stocks, but if we are headed for a deflationary spiral, gold doesn’t stand a chance. But so far, the Philadelphia Gold Bugs Index (HUI) has bounced off the 175 level which I mentioned would act as support.

There’s Always a But…
A caveat to consider: in September 2007 insiders were enthusiastic buyers. Although not nearly as now. That uptick in buying was, of course, not very profitable since most stocks topped out shortly afterward. The question now is, does today’s frenzy mean that insiders see real value or will we simply see the market fall more and insiders get even more excited about buying?

Whatever the answer to that, the solace that the current buying pattern does provide is that insiders are not selling. The worst possible scenario after all, would be to see the “smart money” insiders bail out after the market’s face melting 50%+ decline.

Here is this week’s sentiment summary:

Insider Selling
The bad news is that according to Argus Research, insiders selling pressure is now double what it was during the bottom in March. The good news is that it is still low enough to mean that insiders do not view the ensuing bounce as just a bear market rally. That gives you an idea of just how critical the March 2008 bottom was!

In mid-March, just as the market was trying to find footing, the sell to buy ratio hit 1:1. This is very rare since the long term average is just a tad above 2:1, meaning on a given week insiders sell 2 times as many shares as they buy. The last time this ratio was lower was in October 2002 when it reached 0.89:1.

Even better news, according to new research the “normal” level of selling to buying has been reset much higher due to the increasing allocation of ESOP as compensation for executives. Check out the book by Prof. Nejat Seyhun (University of Michigan) “Investment Intelligence from Insider Trading” for more.

Sentiment Surveys
There were no significant changes in the usual sentiment surveys I follow, namely AAII and Investor’s Intelligence, as bulls continue to outnumber the bears.

Investor’s Intelligence had 47.3% bulls and 30.8% bears while AAII had a similarly slight increase from 45% bulls to 46%. While optimism has the majority it isn’t anywhere near levels correspondent with major market tops.

ISEE Sentiment
This is rather odd. Usually when the market receives the kind of drubbing it got this week, option traders hurry to buy downside protection. But the reverse happened according to the ISE options data. The All Securities ISEE Sentiment Index actually went up from 117 to 140 on Friday.

This means that there were 140 calls bought (to open) for every put on the ISE platform. This isn’t the highest levels of optimism by any means. On October 8th it reached 187 and October 29th 192. But it isn’t just the absolute level of call to put buying that surprises me, it is the fact that it follows on a really bad week for the markets.

I’ve been cautious since mid April as indicator after indicator lined up against a strong continued rally. That caution seems to have been warranted as we’ve given up all the gains since. This latest ISEE data point is just one more that should keep any contrarian on guard.

CBOE Equity Only Put Call Ratio
In contrast to the ISEE Sentiment data, the CBOE equities only put call ratio went up during the week. Since it is the inverse with calls being the denominator of the ratio, this means that option traders, as measured by the CBOE became actually more cautious as the market fell.