July Insider Update

08/09/04 09:23:30 AM

by Matt Blackman

For the month of July, insider selling fell to the lowest level in more than a year. It was the largest July decline in seven years. What does it mean?

Security: N/A
Position: N/A

In their most recent monthly client advisory, the Thomson Financial insider transaction research team reported that the monthly volume of profit taking by corporate executives in July declined to its lowest level since April 2003. According to the July insider sell/buy ratio, insiders sold $19.25 of shares for each dollar purchased, down 40% from the June ratio of $32.06.

Insider buying also declined as expected in the summer but dropPed less than 10%. This was far smaller than the roughly 45% decline in insider selling, which was the biggest July drop the team has witnessed in seven years.

The report singled out the finance sector and particularly the banking industry, as experiencing some of the strongest insider buying in the last six months. Companies mentioned included Wachovia Corp. (WB), Commerce Bancorp (CBH), Mecantile Bankshares (MRBK) and PNC Financial (PNC) with "notable" acquisitions to date.

Figure 1 � Ratio of insider buys to sells in dollars. Data -ThomsonFinancial.com

Interesting examples from other sectors experiencing insider-buying activity included Amphenol Corp. (APH), Humana Inc. (HUM) and Motorola (MOT).

The insider sell/buy ratio dropped below the $20 threshold that separates bearish and bullish activity levels for the third time in the last four months. The major indexes put in new lows in the first week of August and markets were very oversold on short-term momentum indicators -- a very interesting coincidence. Are insiders providing the market with one more bit of evidence that we may be nearing at least a temporary market bottom?

In his August 1st "Magic T" insider newsletter, George Musea noted that insiders were neutral across all market caps. Selling declined the last time the Dow Industrials dropped below 10,000. He repeated his advice that it was a trader's market and recommended only short-term trades. He believes that a "decisive break of the Dow below 10,000 might be necessary to move the insider Buy indicator to give a buy signal."

Trying to pick a bottom, also known in trader jargon as "trying to catch a falling knife," is aptly named. Those who try it are very often skewered in the process. Best to see signs of a turnaround before jumping in with both feet. Borrowing from sage pilot wisdom, there are old traders and there are bold traders, but there are very few old, bold traders with any money left.

SUGGESTED READING:

Blackman, Matt [2004] June Insider Update, July 9
http://technical.traders.com/tradersonline/display.asp?art=1830

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" Newsletter, August 1

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], July Sees Substantial Pullback in Executive Selling, August 3, Thomson Financial Client Advisory

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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