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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Friday, December 13, 2019

1. Investors bullish, shrug off trade war news

2. Are insiders good traders?

3. Insider investing moves contain low-value information

Market Moves

Large cap stocks held their ground while small cap stocks retreated a bit in mixed trading to end the week. Investors signaled that they remain bullish despite a tepid reaction to news of a trade deal. The S&P 500 (SPX), the Nasdaq 100 (NDX), and the Dow Jones Industrial Average (DJX) all closed a whisker-width in positive territory, while the Russell 2000 (RUT) small cap index and the Russell Microcap index (RUMIC) fell back by one-half percent.

A quick review of the S&P 500 Volatility Index (VIX) and the exchange-traded funds that track VIX futures with 30-day and 90-day expiration dates shows an interesting dynamic (see chart below). The futures-based indexes are moving to close at lower lows than their previous multi-month trend lines, while the VIX itself remains at an elevated level.

This apparently reflects recent concerns about U.S. China trade talks. Experienced chart watchers will recognize this as a sign that option market-makers are pricing in short-term uncertainty. What is more interesting to consider is that these indexes do not have the same risk premium priced in. This is a bullish forecast for 2020.

Are insiders good traders?

In a recent query sent to the Chart Advisor e-mailbox (oh yes, we do read them), one reader made a suggestion regarding insider buying and selling and the influence these activities have on stock prices. The two charts below are constructed out of publicly available data on J.P. Morgan Chase and Company (JPM) and Wells Fargo Corporation (WFC) respectively. Red arrows on the chart depict times insiders sold shares, green arrows represent buying, and yellow diamonds indicate exercising stock options.

One of these charts ought to dispel any notion that company insiders have some uncanny ability to time their trades to peak profitability. Peter Lynch publicized the notion that legal and ethical insider transactions include insiders who sell their stocks for a variety of reasons but usually only buy, or at least don't sell, for one logical reason: they think the share price will move higher. Lock-up agreements aside, if any officers of a company should be able to time the transactions of their investments, one would suspect that a major investment bank would be rife with such individuals.

By this standard shares being sold on J.P. Morgan seem rather poorly timed for 2019. Over 60 million shares of stock were sold throughout the year, while roughly only 7 million shares were bought. Considering that the stock is up nearly forty percent this year so far, in hindsight it would seem that ratio should have been reversed.

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Insider investing moves contain low-value information

This second chart, showing Wells Fargo Corporation (WFC), displays similar information. Only one major sale occurred and it was closer to the lows of the year than the highs. Notably there are fewer transactions on this company stock by insiders as compared to JPM shares. One reason may be that over 70 percent of the company's shares are owned by insiders, and they are more circumspect about influencing the share price.

This fact underlines the idea that insider information is complex and requires diligent research to make sense of it. Though the concept is not well established, some research suggests that insider information may yield profitable insights. Those attempting to gather such insights should temper expectations.

The Bottom Line

Stocks closed nearly unchanged for the day though trade war news sparked intraday fluctuations. In the end, unimpressed investors reduced fears and appeared to prepare for the long run. Insider trading in general has been subdued on J.P. Morgan and Wells Fargo Corp.