Current Market Vexes Insiders
A wise insiderís advice? Be patient, this is no time for heroics. Hereís why.
September 22, 2008
by Jonathan Moreland
[DISCLOSURE: Readers should assume that all stocks mentioned in this column are owned by the author and/or his firm unless otherwise noted.]
Despite the obvious breakdown in the indices, I am still maintaining my month’s long cash cushion of 33 percent. While we’re (hopefully) coming to the end of the large government bailout stage of this financial crisis, CPA Insider™ readers should note that the past week has merely identified and quantified (however imperfectly) the near-term problems the system faces.
But discovery is not resolution. Having some idea of the problem’s scope is not the same as fixing it. Indeed, the ability of our comrades in government to fix the problem is still debatable. Meanwhile, any attempt at thoughtful fundamental analysis of new and existing positions is virtually meaningless. The systemic risk to all equities is so high now that that this variable will likely dictate any individual stock’s price movement in the near future much more than any company-specific news.
As stated numerous times in this year’s InsiderInsights newsletter, I believe that this market has been great for day traders and Warren Buffett. Traders love this type of volatility, and real long-term investors like Buffett don’t care whether their well-researched value investment casually lost another 20 percent out of the gate.
But the remarkable reversals — many of which have been government induced in the market lately — must even be blindsiding some day traders. Perhaps the major outcome of this colossal meltdown of our once-respected financial institutions for analysts and money managers will be to make long-term investing once again en vogue … when the market finally settles down, that is.
As a group, insiders seem to be as vexed as most about when a real-bottom will be put in this market. With the benefit of hindsight, the rolling four-week average of my weekly buy/sell ratios has been moving sideways within a narrower-than-normal range since last fall. Strong inflection points in this metric (which have usually corresponded with short-term market tops and bottoms) have been lacking. This is certainly representative of the muddle the market is in.
I remain more fearful of a much more bearish spike north in my Indicator than another long-term bullish inflection downwards. Prior to 2003, substantial market bottoms tended to correspond with this Indicator inflecting downward, after it had risen to at least positive 40. CPA clients should note that if that threshold is hit again, it will likely be the result of a large swoon in the market. With the numerous economic imbalances built up over the years reversing course now, such a swoon seems more possible than ever.
So I remain wary that this market, and future government intervention, could be overwhelmed by bearish economic realities. Certainly, trying to bottom tick financials and retail stocks is out of the question for me. In any case, insiders’ recent signals on those sectors aren’t obviously bullish enough for me to make that case.
The one sector with the most solid insider buying is energy. Natural gas exploration and production (E&P) firms still have relatively bullish-leaning insider profiles. So too do the midstream energy master limited partnerships (MLPs). Yet following insiders into those sectors recently has brought nothing but pain. Despite the bullish long-term fundamentals I still see in those industries, systemic pressures have understandably made these stocks cheaper.
So, CPAs, remember to think before you leap and advise your clients to be patient as this is still needed right now — even before jumping into longer-term value positions.
Patience and cash.
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Jonathan Moreland is the Director of Research at New York-based InsiderInsights.com. View a FREE trial issue of the firm's weekly newsletter InsiderInsights.