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INSIDE BUY/SELL


June Insider Update

07/09/04 09:19:09 AM
by Matt Blackman

Insider buying increased in March, April and May. In June, it reversed direction again. Does it signal tougher times ahead?

Security:   N/A
Position:   N/A

Corporate executives sharply reduced share purchases in June, reversing a three-month trend of consistent buying, according to the Thomson Financial Insider Research Team July client advisory. The ratio of shares sold to those purchased increased 58% from 18.76 in May to 29.61 in June. In doing so the ratio, considered the best indicator of overall insider activity by the company, moved back above the bearish threshold of $20 as insiders purchased just $102 million of shares in their own companies versus $178 million last month, a 42% decline. Insider selling dropped 9% from $3.3 billion to $3 billion during the same period. May's ratio was the lowest in more than a year.

It is normal that both decline as summer approaches as corporations typically restrict insider transactions as Q2 reporting approaches but this pullback was "significantly more pronounced than we had anticipated."


Figure 1: The insider sell/buy ratio showing lows and highs during the last 20 months with the bearish ratio threshold of $20 selling to each dollar of buying. During the last buy signal in November 2002 to April 2003, the S&P 500 Index ranged for 875 to 930. In the week following the October 2003 peak signal, it traded between 1044 and 1062 and then continued higher. However, in the week following the release of the February 2004 signal, it traded between 1144 and 1156 and dropped to 1095 in May. Data provided by Thomson Financial http://www.thomsonfinancial.com
Graphic provided by: www.thomsonfinancial.com.
 
Looking forward, there is generally no discernable change in buying and selling activity in July as many corporate insiders are on vacation. In his weekly "Magic T" newsletter, insider expert and author George Muzea commented that insiders were negative across all market caps and that the lack of insider buying warranted increased caution. He recommended that clients avoid buying stocks in the Nasdaq 100 as "for the first time ever, there [were] no open market buys" and suggested using a short-term trading approach only for the rest of the market.

Insider buying and selling tend to provide useful buy and sell signals for the rest of us to follow when used in conjunction with trend analysis and general market sentiment. Insider buying (as demonstrated by a low sell/buy ratio) tends to be a very good buy signal near market bottoms or in bull markets and a high ratio, a good selling signal near market tops and in bear markets. Easy to see in hindsight, identifying tops and bottoms are far more of a challenge at the time they are occurring.


SUGGESTED READING:

Blackman, Matt [2004] Insiders Continue to Trade Shares for Dollars, April 13
http://technical.traders.com/tradersonline/display.asp?art=1656

Blackman, Matt [2004] Insiders Aren't Buying the Bull, March 11, http://technical.traders.com/tradersonline/display.asp?art=1577

Muzea, George [2004] The "Magic T," July 4

Muzea, George [2003] The Vital Few vs. The Trivial Many, Literary Press
http://www.vitalfew.info/

Seyhun, Nejat H. [2000] "Investment Intelligence from Insider Trading," MIT Press

Thomson Financial [2004], Insider Buying Retreats During June, July 7



Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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