NEW YORK (Reuters) - A recent uptick in insider buying is normally considered a positive for the stock market, but it may be misleading for investors.
More insiders are buying shares again, which is supportive of a rally, but not unanimously bullish. The sentiment among insiders mirrors action in the options market and technical indicators that also suggest an upside in stocks, but with some risk for weakness down the road.
Investors are hoping last week's sharp rally is a sign recent selling has come to an end. The S&P .SPX closed its best week in six with a 3.8 percent gain, helped by U.S. manufacturing and labor market data that was stronger than expected.
Data from Insiderscore.com, a company that ranks open market insider transactions, showed a slight uptick in sentiment among insiders in the last week of August.
However, Ben Silverman, an analyst at Insiderscore, said the uptick looks similar to one in November 2008, when stocks briefly stopped falling before declining anew through March 2009.
“The quality of the buying isn’t really there. It lacks conviction. That’s what I’ve been telling clients,” he said.
Insiderscore’s rating for insider sentiment rose to around 0.5 point — a weak buy signal — at the end of August from just below zero at mid-month. Its scale runs from -4 to +4.
Using insider transactions to gauge sentiment is not an exact science. Insiders were good at calling the market’s bottom, timing the 12-year low nearly perfectly by buying when the market crashed in March 2009. They then sold solidly all through the rally in the remainder of the year.
Comparisons between the recent declines and the crash of 2008-2009 may be overdone, but worries the economy is heading into a double-dip recession could pressure equity markets heading into the end of the year.
Corporate profits in the third quarter will be a key test of the double-dip theory. Trading windows for insiders will close soon, with only a few weeks remaining for insiders to position themselves ahead of company earnings reports.
Stock market sentiment among general investors has shown some improvement after the recent rally but remains generally negative. Bullish sentiment among individual investors rose 10.1 percentage points to 30.8 percent in the latest AAII Sentiment Survey, below its long-term average of 39 percent.
Neutral sentiment is at 27 percent, down 2.8 percentage points, while bearish sentiment fell 7.3 points to 42.2 percent, according to AAII.
Options traders are showing a mixed view of the market through year-end. Open interest in puts in the S&P 500’s tracking ETF suggests more worry about a decline.
Put options give investors the right to sell at a given date at a given price. Puts on the SPDR S&P 500 exchange traded fund (SPY.P) in October, November and December show more open interest at strike prices that are further out of the money than similar calls, suggesting some traders see a chance of a greater swing to the downside.
However, after September there is also significant open interest on calls on the S&P 500-tracking ETF that are far out of the money, suggesting highly divergent views.
Open interest centers on a strike price of $114 for calls and $104 for puts in November, while there is a lot of interest in $115 calls in October and $120 calls in December. Open interest on puts is centered on $100 in all four months except November, where the action is around $104.
Currently the SPDR S&P 500 is up 0.8 percent at $110.59
“As we get more out (in the year), there is potential for substantial volatility,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research.
The market’s technical picture has also started to improve. The S&P 500’s moving average convergence-divergence, or MACD, generated a ‘buy’ signal after having been stuck on a sell signal since August 11. The last time the signal turned bullish was July 9, foreshadowing an advance that ended a month later.
Alex Romayev, owner and co-founder of Form4Oracle, which also tracks insider selling, says that in the last 4 weeks his insider buy ratio has jumped to 42 percent from 33 percent in the previous 4 weeks and is at its highest level in a year.
However, Romayev points out that sentiment suggests only a faint buy signal.
“If anything, they’re back from the very strong sell territory which we saw in April, May this year when the market jumped to its high,” he said.
Additional reporting by Angela Moon and Rodrigo Campos; Editing by Dan Grebler