Sunday, November 11, 2018

Insiders are buying, should you jump into stocks?

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. The turnover rate of the trading model is high, and it has varied between 150% to 200% per month.

Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bearish*
  • Trading model: Bearish*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

Insiders are buying
Regular readers will know that I have been sounding cautionary technical warnings because of a negative monthly RSI divergence and a MACD sell signal for US equities. This combination has been uncanny in the past at warning of major market tops.

On the other hand, the latest report from Open Insider shows that corporate insiders, who are known as "smart investors", have been buying the latest dip. Historically, sales (red line) exceed buys (blue line) by a significant margin. A funny thing happened during the latest correction. Sales dried up, and buys exceeded sales, which is an indication that insiders are showing confidence in the share price outlook of their own companies.

How can we square the circle of these two contradictory signals? Should investors be buying or selling equities?

The full post can be found at our new site here.

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