Blame the Tools!
The fact that the bearish signal did not predict a market pullback as well as it usually does has bothered some people tremendously. "Once again, the media have trumped up a phony reason to scare investors into thinking the end of the world is just around the corner," gripes a recent
SmartMoney article headlined "The Fallacy of Insider Trading."
Well, if anyone is using the latest insider signal to dictate a drastically bearish investment policy, I'd side with the article. But then, such a prescription would identify the analyst as quite a novice. In any case, I've seen many talking heads dissing this valuable source of investment intelligence, not using it as a portent of doom.
From my soapbox, I've been vocal about the concerns that the insiders' red flag raises about the health of this market rally. But even at my most bearish point last November, I still was 70% long. The rest of my portfolios were hedged with shorts or bets against the
Nasdaq 100 Index(QQQ Quote). I had some cash to boot. My mantra was, "Stay long, but stay wary." Nobody I consider experienced at following insider data was overwhelmingly short either. So I'm going to assume that the "world is ending" interpretation of the recent insider signal was made in less savvy media outlets.
No Apologies Necessary
Another assertion used by would-be apologists for the apparent bad signal from insiders is that options-related insider trades are masking the true buy/sell ratio. Specifically, they're saying that a large volume of option exercising by insiders in reaction to this rally has made the ratios seem falsely bearish. This certainly seems logical, and I too have wrestled with just what transaction types should be included in my own ratios. As I mentioned, I already exclude nonopen market trades, and have crunched numbers in ways that also exclude odd-lot trades and trades below a certain dollar value.
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Jonathan Moreland
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