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[normxxx]

Streetwise: August's Odyssey [¹]

Click here for link to complete article

By Michael Santoli, Baron's | 1 September 2007

A few more gut-grinding, portfolio-rattling months like that and we're all going to have to get used to the idea of the stock market at a new all-time high.

That's not— banish the thought— a prediction. But does it cause puzzlement to anyone else that August— for all its scary tape action amid the specter of financial contagion— finished with the Dow up 1.1% and within 5% of its all-time record of 14,000?

This is not to traffic in perma-bull platitudes about the market's "resilience," but to point out that stocks began to discount some rather grave effects of the credit-market storm in a fairly rapid period of time. By the midday lows of Aug. 16, with the S&P 500 down 12% from its high in four weeks, stocks had gone a long way toward pricing in the known risks and some portion of the "God forbid" nightmare scenario.

As the month neared its end, the Fed squeezed its liquidity nozzle and it seemed that everyone who was forced to sell might have sold and hedge funds dealt with redemption notices and four big brokerage firms sealed their books for the third quarter.

Don't mistake this for the all-clear signal, of course. The eye of the hurricane brings clear skies and chirping birds just as does its end. The market still needs to prove that there are buyers a couple percent above current levels, by no means a forgone conclusion.

And yes, every trader who ever walked past a Bloomberg terminal is expecting a "re-test" of that perilous low of a couple weeks ago. It's only prudent to expect this— and perhaps to wish for it— even while wondering what chance it has of occurring when "everyone" is looking for it. And have you heard yet that September is historically the market's worst of the year, or has your cable been out for the past week?

With it all, though, it remains striking that as small investors steer clear of stocks and much of the financial press has taken on a scolding, sometimes mocking tone toward Wall Street, corporate insiders have been buying more stock relative to their sales than at almost any other time.

The ratio of insider selling to buying has been below 10 for nine weeks, a rarity. And TrimTabs last week noted that insiders were net buyers of shares on six separate days this year, and four of them were since Aug. 16. [ Normxxx Here: Normally, insiders are heavy net sellers because of their beaucoup stock options. ]

Meantime, money-market fund inflows have surged and the American Association of Individual Investors survey Thursday showed bears outnumbering bulls for a fourth straight week.

True, some other markers of investor anxiety have not sunk to the levels seen near the bottom of the summer selloff of 2006. And it would be nice to see Treasury yields rising more, to show that the safety trade was unwinding.

If the market dodges all the bullets and emerges in good shape, it won't be because all is dandy economically or because we deserve much more from stocks or because we're not due for one of these pullbacks to turn into something nastier. It would simply reflect the good luck of where things were when all this started.

The skeptics talk of a dramatic credit-derived slowdown. Yet the economy came into the crisis at a decent growth clip, revised up to 4% for the second quarter. The bears wail about the banks having low reserves. But their loan losses also had been quite low for a while, so they have adequate capital to deal with the problem. Won't a slowdown mean losses and lost business for Wall Street's packagers of mortgage exotica? You bet— and already the layoff notices and clipped bonuses are paying for much of it.

And because stocks were not terribly expensive to begin with and equities were not the locus of the financial excesses, maybe their adjustment can be shallower.

Finally, these financial ruptures have come at a time when the market's loan sharks are flush. The papers report that TCW and others are raising distressed-debt funds. Goldman Sachs (GS) is pulling together a $20 billion corporate-debt fund. The hedge fund Citadel keeps taking on the portfolios of fallen competitors. Bank of America (BAC) writes a $2 billion check to Countrywide (CFC), with strings attached. This says nothing about the direction of the next 5%, but it doesn't hurt to see.

Normxxx    
______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

Edited by normxxx, 01 September 2007 - 08:47 PM.

[ogm]

I think the guy who wrote the article was reading my posts j/k.

[eminimee]

ogm....you are your own worst ememy...chill baby.....it's a bull...but for God's sakes......play the swings...........there is a few more to be played. ...play it long....if you can stand more that a 30 point swing against your position from 1480 spx...

[ogm]

ogm....you are your own worst ememy...chill baby.....it's a bull...but for God's sakes......play the swings...........there is a few more to be played.

...play it long....if you can stand more that a 30 point swing against your position from 1480 spx...

I am playing the swing right now. Someone plays them on 5 min charts, I play them on longer term charts.

[spielchekr]

So, do insiders always buy as an investment choice and never as career choice? For example, when shares are cheap, one can perhaps better afford to buy one's self a chair or two closer to Da Power Seat. I'd imagine there's a bit of competition for that, too. It's common knowledge that there reasons for insider selling that are not related to investment strategy. It's rarely thought out that the same could hold true for insider buying. The insider game could be as much about ego as it is about money. Just a thought over my 1st cup of coffee, and a reason that it doesn't excite me.

Edited by spielchekr, 02 September 2007 - 08:17 AM.

[n83]

So, do insiders always buy as an investment choice and never as career choice? For example, when shares are cheap, one can perhaps better afford to buy one's self a chair or two closer to Da Power Seat. I'd imagine there's a bit of competition for that, too. It's common knowledge that there reasons for insider selling that are not related to investment strategy. It's rarely thought out that the same could hold true for insider buying. The insider game could be as much about ego as it is about money. Just a thought over my 1st cup of coffee, and a reason that it doesn't excite me.

very good..

[ed rader]

So, do insiders always buy as an investment choice and never as career choice? For example, when shares are cheap, one can perhaps better afford to buy one's self a chair or two closer to Da Power Seat. I'd imagine there's a bit of competition for that, too. It's common knowledge that there reasons for insider selling that are not related to investment strategy. It's rarely thought out that the same could hold true for insider buying. The insider game could be as much about ego as it is about money. Just a thought over my 1st cup of coffee, and a reason that it doesn't excite me.

we debated ad nauseum the significance of insider buying a couple of years ago and my recollection was flip a coin.

ed rader

[normxxx]

So, do insiders always buy as an investment choice and never as career choice? For example, when shares are cheap, one can perhaps better afford to buy one's self a chair or two closer to Da Power Seat. I'd imagine there's a bit of competition for that, too. It's common knowledge that there reasons for insider selling that are not related to investment strategy. It's rarely thought out that the same could hold true for insider buying. The insider game could be as much about ego as it is about money. Just a thought over my 1st cup of coffee, and a reason that it doesn't excite me.

Insiders always buy for investment purposes only! Buying has zero influence on career, except in very few rare and special cases. See corporate governance for why, especially the sections on History and Role of Institutional Investors. Nowadays, most corporations are owned by institutions who couldn't care less about how much stock the officers of the company own. Moreover, most officers of the corporation are showered with stock options, so they hardly need to buy more— they usually have trouble getting rid of the shares they own. The only thing that counts in getting on the BOD is a close relationship with the Chairman/CEO. Shockingly, many CEOs own hardly any shares in the companies they manage.

On the other hand, except for a few, insiders are bad at timing: as a group, they mostly buy when stocks are going down and sell when they are going up. A decent strategy, but not very precise. It's why the raw data on insider buying or selling is relatively useless.

Normxxx
______________
The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

[spielchekr]

NORMXXX: good argument. So now I can move on to the next step. Massive buybacks, then correction, then massive insider buying. Sounds bullish, but WHICH insiders are buying? That is more knowledge I lack. Remember, we're talking massive scale here, not just indivivual stocks. Is it the officers?

http://www.pennysleu...6/01_05_06.html Excerpt:

Insider Trading Strategy: Four Simple Rules

Of course, you can't blindly just invest in any stock with the hint of insider buying. There are some simple rules you should follow:

1) Look for insider buying from CEOs, CFOs and COOs, versus directors or institutions. Many directors are required to buy and hold stock in the company. And institutions are often terrible buy or sell indicators -- in any capacity. But a CEO, CFO or COO is an investor like you and me. So when they use their own money to purchase their own stock at market prices (not through stock options), that is a very bullish sign.

2) Make sure the insiders are buying significant amounts of stock. If a CEO already owns 5 million shares in his company and adds another 5,000, that may not be worth getting excited about -- especially if it is a $1 or $2 stock. But it is a bullish sign to see a CEO (who is making $500,000 a year) plop down $200,000 in his own stock.

3) Look for what I call "cluster buying." It's one thing to buy a stock just because a CEO buys. But when a CEO, CFO and a COO all buy around the same time and at the same price, you should pay attention: Those who are most intensely involved with the day-to-day operations of the company are all bullish at the same time. That's your clue to buy.

4) Finally, look for insiders continuing to buy even as the stock price rises. If a corporate officer spends $1 million of his own money to buy a stock at $5 and then spends another million to buy more stock at $7, that's a bullish sign.

Great, so you have some historical data and a few rules to help you build an insider screen of your own. So where are the insiders putting their money right now?

Edited by spielchekr, 02 September 2007 - 10:09 PM.

[normxxx]

NORMXXX: good argument. So now I can move on to the next step. Massive buybacks, then correction, then massive insider buying. Sounds bullish, but WHICH insiders are buying? That is more knowledge I lack. Remember, we're talking massive scale here, not just indivivual stocks. Is it the officers?

...

Who is buying for an individual company, among officers and BOD, is a matter of public record and can be obtained for free from some services.

However, Thomson Financial used to supply an index in which each insider was rated on the size of his purchase or sale (relative to his previous position), and in which each insider received a weight based on the correlation of his purchase/sale of stock and the change in price of the stock 6 months down the road. I believe Wall Street (their real benefactors) made them stop. It was the last such index that was of some value.

Lowry's Reports Buying Power / Selling Pressure Index, also based on insider purchases and sales, is nowhere near as good.

From a March 7, 2007 article, Blue Skies or Rough Waters Ahead, Which Is It? Keeping an Open Mind by Chris Puplava:

"Lowry’s Reports Inc. had been warning of a market correction long before it was witnessed last year as they saw selling pressure increase at the same time buying power (demand) was falling. A chart of their data for buying power and selling pressure is provided below, showing buying power peaking in the summer of 2005 at the same time selling pressure bottomed. Buying power remained in a downtrend throughout the first half of last year indicating the markets were rising on weaker investor demand, and the rising trend in selling pressure indicating investors were selling into strength. The market correction last May came as no surprise to Lowry’s as they warned their subscribers in advance.


Source: Lowry’s Reports Inc

"What is significant is the fact that the negative downtrend in buying power and the positive trend in selling pressure reversed course and broke their respective trends last September, pointing to new life in the aging bull market that began in 2002. Weakening internals prior to last Tuesday’s dramatic sell-off were absent as Lowry’s buying power index was reaching confirmatory new highs, and the selling pressure index was reaching confirmatory new lows, both healthy conditions for a bull market advance. Lowry’s weekly commentary report for the week ending 03/02/07, used with permission, is provided below:

"As pointed out in last Friday’s report, the internal condition of the NYSE market just before Tuesday’s decline was healthy, with none of the classic warning signs that typically precede major market declines. Our Buying Power Index had been at a 9-month high just three days earlier. Our Selling Pressure Index, which is usually in strong uptrend pattern for months in advance of important market tops, had been at a 9-month low just three days earlier. Our cumulative totals of Net Points Gained and Net Upside Volume were just slightly off of new all-time highs. The Adv-Dec Lines for our OCO universe of NYSE-listed stocks, as well as for the S&P 500, 400 and 600 components, had been at new all-time highs just days earlier. The % of stocks above their 30-day moving averages had been at a very healthy 82% level. And, our Average Power Rating, based on the relative strength of 1,000 key stocks, was at an 11-month high. In brief, since there were no significant signs of weakening Demand and no notable signs of expanding distribution, the probabilities drawn from our 74 year history suggest Tuesday’s sell-off did not mark the start of a major market decline.

"It was Tuesday’s intensity that will go into the record book. Downside Volume equaled 99.1% of the sum of Upside plus Downside Volume, and Points Lost equaled 98.7% of the sum of Points Gained and Points Lost, qualifying as an official 90% Downside Day. Our 2002 award-winning paper on 90% days, titled Identifying Bear Market Bottoms and New Bull Markets was essentially a study of panic selling, which takes one of two forms in the stock market. The first occurs after many months of declining prices and deteriorating investor psychology (bear markets) when investors finally “throw in the towel to avoid losing everything”. A second form of panic selling occurs when some piece of unexpected bad news triggers a sudden nervous reaction, much like the back-fire of a car on a dark street. Once it is realized that the panic was an over-reaction, most people tend to return to what they were doing before the scare. In the present case, there was no evidence of a prolonged deterioration of investor psychology. Past experience shows that 90% Downside Days occurring near the market highs with no warning signs of a major market top, are typically part of short term corrections, and thus eventually provide an opportunity to buy stocks with strong Power Rating patterns at the time of the next short term buy-signals, for a resumption of the primary market advance.

- Paul F. Desmond & Richard A. Dickson, Lowry’s Reports, Inc
(Weekly Market Trend, 03/02/07)

"As mentioned by Mr. Desmond and Mr. Dickson, Lowry’s impressive 74 year history suggests that last week's sell-off was likely a healthy correction within the context of a bull market and not “the start of a major market decline.” With Lowry’s Reports Inc.’s reaction to last week’s correction, along with Jim Jubak's comments that he still stands by his advice from his February 20th column, “Don't jump ship on this rally yet,” investors should not be quick to call an end to the current bull market and put on their bearish hats just yet.

Still sounds like good advice— so far.