THOUGHTS ON MEDIOCRITY IN EARNINGS, PORTFOLIO PERFORMANCE AND HOW TRACKING INSIDER BUYING CAN BE USELESS
We're getting our first look at what earnings season July 2012 is going to look like. It can be summed up as mediocrity, even disappointment, splashed with glimmers of sunshine and speckled with periods of darkness. Just like the market, there is little consistency. Most importantly, that lack of consistency is not at all a surprise. It was seen from a million miles away for months now by even the most optimistic market participants.
In my June Month End Summary delivered on June 30th, I wrote: "There is a very strong perception of July earnings coming in weaker than expected rendering any rally from this point useless once the second week of July roles around and companies begin announcing the horror of the previous quarter. I don’t think the negativity with relation to earnings is as cut and dry as it seems. We either rally right through a negative earnings period based on a factored in, looking ahead type mentality OR earnings and forward projections will be nowhere near as bad as most are expecting."
I continue to look for that "factored in" rally to take place. Although now I am also entertaining the possibility of a sideways market right through earnings, basically remaining in the 12,300-12,900 range for the Dow. The lack of participation, generally speaking, has been pronounced. Even more so than summers of recent memory. A wait and see approach seems to taking place among those who have the power to influence market movement. The rest of what is occurring is simply running through various technical levels to see who says "uncle" first. A game I am not interested in playing.
I can't complain. I am up about 1% for the month and roughly 25% for the year mid-way through July. I'm sitting at 75% invested of capital, with a 25% cash position that I am eager to put to work once my intermediate term trend indicator turns. As of tonight, both my long-term and short-term trend indicators remain positive. I need all three to give me the buy signal before I fully commit to the market.
On another note, one of the research pieces I track closely is insider buying as it relates to small-cap companies. I am seeing a severe drought in insider buying over the past few weeks, the likes of which is rarely seen. The volumes are basically nonexistent.
There is a school of thought that exists on Wall Street that considers insiders "smart money" and considers an absence of buying, similar to what we are experiencing currently, an ominous sign for the months ahead. I have a problem with that school of thought.
It has been my experience that insider buying as it relates to the cumulative act of measuring buying or selling as one piece of information is not at all a reliable signal for the general market. There are certain scents or marks I search for with insider buying that alert me to something bigger going on with individual opportunities. But taken as a blanket statement of market bullish or bearishness based on the level of insider buying or selling is a fool's tool for predicting general market movements.
If anything, insiders are just as susceptible to being fooled by frightening headlines and perceived calamity as any average Joe who traders take pride in speculating against. The lack of insider buying taking place at present could simply mean that just like everyone else in finance, insiders also remain in wait and see mode until some clarity is gained into the numerous financial plagues bearing down upon the developed and emerging economies.
Those are my thoughts for tonight.
Goodnight.
