Since I posted the bullish general market article last time, I think I should post this neutral/warning article :
Thursday, March 12, 1998
"New figures show tempered enthusiasm among corporate insiders"
That's not cause for alarm; they're just "stuck at
pleasantly positive levels"
By Michael Brush
We've had a teflon president. And now, it seems, we
have a teflon market. Despite a slowdown in Asia and a
worsening of the earnings outlook, blue-chip stocks
rose to their second record in a row Wednesday,
continuing a solid run that began at the end of
January.
Will this bull market ever stop? Insiders, who have an
uncanny ability to call market trends, may be starting
to think so.
Four weeks ago, we told you that insider sentiment was
upbeat
(http://www.pathfinder.com/money/moneydaily/1998/98021
3pm.moneyonline.html).
It still is, but the optimism is leveling off. Unlike
investors, who continue to pile into this market and
drive stock prices up, the insiders have paused for a
little look around to see where things are going.
Is this a bad sign? Not necessarily.
"It's kind of like having no way to get home from a
nice vacation," says Richard Cuneo, the editor of
Vickers Weekly Insider trading report. "We're no
longer surging forward, as was the case over the past
month or so. But we're not headed backwards either.
We're simply stuck at pleasantly positive levels."
Here are the hard numbers. Insiders typically sell
about two or two and a half times as much as they buy.
So they send off a neutral signal, according to the
Vickers system, when the eight-week ratio of sales to
buys is between 2 and 2.5. Anything below is bullish
-- the current number is a moderately positive 1.61.
To put things in context, the ratio sent off a
screaming sell signal when it rose to 3.45 the week of
the crash last October.
While the main Vickers indicator hovers in slightly
positive territory, there are now some fresh, and
fairly negative signals coming from other insider tea
leaves. One is the furious rate at which insiders are
filing the paperwork (Form 144) needed to register
shares before they sell them. This is usually a good
leading indicator of how insider sentiment overall is
about to change.
Insiders often get paid in shares that are not yet
registered with the Securities Exchange Commission
(SEC). To sell them, they first have to register them
with the SEC. Lately, they have been doing so at a
quick pace. How fast? About 70% faster than normal,
says Cuneo.
"We are seeing very heavy Form 144 volume," notes
Cuneo. "The market is at new highs, and people may be
taking profits. So I am not ready to say the sky is
falling yet. But it is certainly something that we are
watching."
Here's another troubling trend. A second leading
indicator of insider mood, the one-week sell/buy
ratio, has moved into neutral territory. This is
noteworthy, says Cuneo, because the signal was in
solid bullish territory for the past threee months or
so.
Michael Painchaud, the research director of the
Seattle-based Market Profile Theorems, which also
tracks the insider mood, says his indicator has also
moved into neutral territory, after nearly putting out
a buy signal back in the middle of February.
Does all this mean a sell-off is imminent? No.
Insiders are known to get things wrong. Generally,
though, they are skilled market timers, which should
be no surprise, given their close-up view of how
business is going.
And if the recent shift in insider sentiment is not
enough to raise a warning flag, don't forget the
troubling trend in earnings revisions. Since Jan. 2,
analysts have revised down their first quarter 1998
estimates for the S&P 500 companies sharply, says
Chuck Hill, of First Call. They've reduced those
estimates to just 2.1% growth over the same quarter
last year, from 10.4% growth they were projecting at
the start of the year.
"Normally we get two to three percentage point drop
from the beginning of a quarter to when the reporting
season starts," says Hill. Instead, estimates have
come down over eight percentage points. "And we are
still a month away from the reporting season." That
will start in the second and third week of April. "It
is clearly not business as usual," says Hill.
If things are looking so bleak on the profits front,
why hasn't the market noticed? "Nobody cares about
earnings," says Hill. And nobody seems to care about
high valuations, either. Based on earnings from
continuing operations (stripping out one-time
increases from things like acquisitions), the S&P
index is trading at 21.6 times 1998 earnings, levels
not seen in at least 30 years.
"To be here at a record multiple when there is this
kind of risk of a slowdown in earnings seems kind of
unusual to me," says Hill. Then again, a lot about the
stock market seems unusual these days.
pathfinder.com
Mang |
