RealMoney Silver - Despite Meltdown, Financial Insiders Are Buying

Despite Meltdown, Financial Insiders Are Buying
By Jonathan Moreland
RealMoney.com Contributor
8/8/2007 11:30 AM EDT

It's impossible to know whether this latest correction will end up being a short-term buying event (like that last warning sign, flashed back on Feb. 27), or a signal of a larger slide to come (think any number of days in 2000). My gut leans toward the former.

Heck, the indices' strong showing on Monday and Tuesday of this week could even show that last Friday's collapse was the exhaustion selling that marked a short-term bottom for the market. But I must admit that I'm waiting for a little more convincing follow-through for the market to get back in completely.

My approach is absolutely a reactive one that puts me fully invested when one of those warning signs hits stocks, and in an annoying amount of cash when indices finally do follow through to signal another leg up. But as long as there are at least a couple of months between severe market moves, I still think it's better to play the dominant trend at the time and react to the change when it actually occurs, than to try to the impossible -- namely, trying to predict a near-term top or bottom.

What I lose by being reactive has been much more palatable than the opportunity cost given up by those who try to be geniuses and get out because they think a crash is nigh. Permabears, for instance, have once again been crowing over the past few weeks (just as they did last March). But didn't they go to cash a year or more ago? I'm still up 25% year-over-year after this dreadful few weeks. Being reactive hasn't been so bad.

Insiders In With A Vengeance

Insiders are decidedly not waiting to buy, however. My weekly insider buy/sell ratio last week was only -4%, which means there were only 4% more companies with insiders selling shares in the open market vs. buying. That's the most bullish weekly ratio since the week ending March 14, 2003.

At this rate of buying, the rolling four-week average of my buy/sell ratios will already reach a level next week that has tended to correspond with near-term market bottoms over the past three years.

Whether indices cooperate this time or not, now is the perfect time to use insider data to build a short list of stocks to get into when you're finally ready.

So where are insiders clearly signaling value? Drum roll please ... the financial sector!

Yup, financials. Small banks, big banks, mortgage REITs, and seemingly any firm with a finger (or arm) in the credit markets. Check out the table below for a sample of the finance companies being bought.

I relayed the bullish call from financial insiders weeks ago. Despite the insider activity then, the news flow and stock technicals of financials still looked ominous enough to me that I was actually going against insiders and closing what exposure I had to financials.

I'm still not prepared to call the bottom for this sector. Considering that there was also a wave of insider buying of financials during last March's weakness, it seems obvious that even insiders can't predict just how badly the fundamentals and fear (which may actually be the larger factor right now) will take down their stocks.

I'm waiting for the technicals of this sector and the particular stocks with insiders buying to tell me that it's safe to take another bet on financials. There seems to be a turn already this week, but not quite enough to convince me that it's all clear.

But I absolutely expect to take another serious punt on this sector in the near future. I have no doubt that this insider buy signal for financials is significant even though I'm not acting on it immediately. I also find the broad-based buying in this arena comforting for what it seems to indicate about the overall health of the U.S. economy, which bears still insist is headed for further meltdown. Financial insiders just do not see their businesses crumbling, even as their share prices do.

And to those who think financial insiders are just acting like gluttons for punishment, consider the following. In the late 1990s, there were several stories in the popular financial press calling energy insiders "clueless" as they bought their plunging shares en mass after oil slipped below $20 a barrel. Journalists with the benefit of a month or two of hindsight wrote their scathing comments as oil proceeded to slip ever further south -- along with most of the energy-related stocks insiders had just purchased.

But a year or two later, even the insiders who bought early were sitting on sizable gains. The lesson is that insiders tend to be early, but they tend to be right.

Inside Bank Job

Click here for larger image.

Source: Insider Insights