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Stocks that have insider selling (three or more insiders) into price weakness should be considered seriously as candidates to sellHow to Find Information on The Vital Few and The Trivial Many IT IS TIME TO DISCUSS THE BEST PLACES TO FIND WHAT YOU NEED TO know about Insiders, Advisory Sentiment, Mood of the Media, Mood of Your Friends and Acquaintances, and the State of the Stock Market. Discussed in Chapter 8, they make up the ingredients of the Magic T. Insiders: There are many web sites on the Internet that offer insider trading information. However, I have found little value in most of them (Paretos 80:20 Rule at work again). The site that I recommend is Yahoo.com. Yahoo! is free. You go to the web site and click on Finance. You then type in a stock symbol and click on Insider. Find the link that indicates Insider Transactions. It will show recent insider trading in your stock of interest. I recommend you ignore everything except open market trading. In my opinion, everything except open market insider activity is noise and should be filtered out. It is very important to know the backgrounds of the insiders in your stocks. Find the link that states Profile. At the lower right of the Profile page, you will see a link that states Full List under View Insiders. You then can review the biographies of those insiders who are trading in your stocks of interest, including how long they have been with the company. It is always of interest when an insider has been with the company for some time and either buys for the first time or dramatically increases his or her purchase dollar value from past transactions. Pay special interest to actions of Officers and Vice-Presidents. These are men and women on the firing line, and money is very dear to them. What could be easier? The Yahoo! insider site is neutral in that it does not offer any stock recommendations. It is my view that you should find your own stocks and then check to see what insiders are doing. Most market letter writers who recommend stocks based on insider analysis have little training and, in my opinion, have just enough knowledge to be dangerous. Remember my thesis that insiders sell into price strength and buy into price weakness. What you want to look for are new purchases where insiders are buying as the stock goes up, as this implies more good news is coming. When insiders are buying a depressed turnaround stock, then you want to see them increasing their ownership percentages by at least 30 percent. Insiders who are just nibbling their depressed companys stock price could be conducting window dressing for investor good will. Another useful web site is vickers-stock.com. Here you can access, free, 24 months of insider history on any stock. Their companion report, the Weekly Insider Report, provides insider trades along with the Vickers Insider Sell/Buy Ratio. An easy way to see if insiders are buying into price strength or selling into price weakness is to go into BigCharts (BigCharts.com). This is a free web site that allows you to see a price pattern for the past 20 years. I usually just check out the past six months to see if insiders are buying on the way up or selling on the way down. I also spend a lot of time on StockCharts.com. This is another free site that provides me with point and figure charts. I like point and figure charts because the signals are clear cut and it is easy to get price objectives. Point and figure charts work well with positive and negative insiders patterns. Actually, StockCharts.com provides price objectives so you do not have to calculate them. InvestorsIntelligence.com uses the Vickers Sell/Buy Ratio for clues to overall insider attitudes toward the stock market. I recommend you ignore their interpretation of the Sell/Buy Ratio when they forecast the year ahead. The Magic T, which is discussed in Chapter 11, uses current insider attitudes toward the market, not projections of where the stock market will be a year later. I am concerned about recommending the Vickers Sell/Buy Ratio because I am not sure how they are treating multiple trades by the same insider in any given month. Prior to September 1, 2003, insiders, in general, filed once a month. An insider who traded five times during the month would list one aggregated transaction. Since September 1, 2003, however, all insiders are required to file within two business days of their trades. That same insider who filed only one aggregated trade must now file his or her Form 4 reporting statement five times. At Muzea Insider Consulting Services, we aggregate all insider trades each month so that our current sell/buy ratios compare favorably to our historical records. We know we are comparing apples to apples, but I am not sure that other companies, like Vickers, that keep their own insider buy/sell ratios are not comparing apples to oranges. Another free web site that provides insights as to insider attitudes toward the stock market is lanceranalytics.com, which uses the dollar value of insider sales in its analysis. My individual subscription services main goal is to teach subscribers that by using the Magic T to control their emotions, they can know when to be in the stock market and when to be out. A secondary service I provide is to offer my interpretation of insider trading in subscriber stocks of interest. I have observed that some of my newer subscribers have a tendency to automatically assume any insider buying in stocks they like is a positive confirmation. Nothing could be further from the truth. Although insider analysis is an art form subject to many interpretations, there are some common themes that if mastered will help one become very proficient at interpreting insider actions. Some of these tips have been covered before, but in this case a little repetition will not hurt. The following six insights are the most important to consider: 1. Insiders normally buy into price weakness and sell into price strength; therefore it is important to look for deviations from this behavior. 2. Stocks that have insider selling (three or more insiders) into price weakness should be considered seriously as candidates to sell. . Insider trading by operating officers is more predictive than those of other insiders, especially outside directors. 4. When analyzing insider trading, it is important to observe previous trading patterns to see if the current trade is in line with or a divergence from normal behavior. 5. When insiders buy stocks that are depressed in price and out of favor, much of the time the buying is a sign of value, but sometimes it is simply designed to ignite investor confidence. The best way to determine which is which is to review carefully the dollar value of the purchases. If the insiders had sold previously at higher levels, they should be buying back at least 25 percent of what they sold; otherwise, they could be window dressing. 6. Most of the time one should look for clusters of insider buyers who have all made decisions to buy stock in their companies. However, sometimes a single trade can be predictive, especially when the buying insider has a good trading history in that stock or the purchase is an unusual divergence from past behavior. These tips will go a long way to getting you started on the interesting and profitable journey that monitoring insider behavior provides. Over the years, I have developed favorite insider patterns that I look for. Analyzing insider behavior is not brain surgery. But like brain surgery, the more you do it, the better you get at it. Insider patterns occur over and over again and it will be just a matter of time before you get really good at it and ultimately find your own favorites. The field of insider trading also holds may untested hypotheses. The sooner you get started at analyzing insider behavior in stocks of your interest, the better. Advisory Sentiment: Regular watchers of financial television programs such as CNBC will get this information free on the air, usually on Wednesday mornings. The weekly magazine Barrons has a Market Laboratory section that provides a number of sentiment indicators, including the American Association of Individual Investors, which I have found to be a great reverse indicator at extreme points. |
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