Trader’s Narrative

One of the key players in the stock market are insiders - those who work at a high enough levels in corporations and therefore are privy to sensitive ‘inside’ information about the health of the corporation, its clients, suppliers, competitors and the economy. Having access to such information firsthand provides them with an enviable edge.

As a group they apply this edge quite well and it is possible to piggy back on this edge by watching them carefully. The only caveat is their edge only appears in the intermediate to long term time horizon. And because of their nature, insiders are natural sellers (option grants, and such). So we have to calibrate our measures to account for this. As well, it is important to view their actions not in isolation but in terms of what the company’s stock has done. For example, if insiders continue to sell shares after an already considerable fall, this bodes badly for a potential rebound.

A common metric is the ratio of insider sells to buys compared over time. This is one of the measures that Argus Research compiles. According to Vickers Weekly Insider Report (one of Argus’ clients) this ratio was at around 7 in April. Now it stands at approximately 2. This means that whereas in April we saw 7 sells for each buy, now we see only 2 sells for each buy. When you keep in mind the inherent bias of insider activity towards selling, you realize that this is quite bullish.

Interestingly enough, there is similar insider buying activity on the other side of the pond. Deutsche Bank analyst Bernd Meyer has put out a report which argues that strong momentum in insider buying has bullish consequences for the market in Europe.

So here we have yet another reason for a rally. But where is the confounded rally? Maybe it will show itself tomorrow after 2:10 pm. Or maybe not. All the reasons in the world mean very little when arrayed against the tape itself.

Source: IHT article, Mark Hulbert article.