Derivatives cloud insider holdings

Most people look to technical analysis primarily for an analysis of price and volume. Hence price diagrams, and the myriad of indicators that can be superimposed upon them, constitute the main body of the technical discipline.

In addition, certain other signals, like sentiment and flow-of-funds, complement the chartist’s toolbox.

Martin J Pring, a leading textbook author, describes sentiment indexes – which monitor insiders, mutual fund managers and investors – noting that, “different groups of investors are consistent in their actions at major market turning points.”

He adds that insiders, such as key employees or major stockholders, tend to be routinely correct; advisory services, which get carried away at market tops and troughs, are more likely to fail, with egg on their faces.

Where does today’s buy/sell ratio stand? Charles Biderman of TrimTabs Investment Research reports that over November it averaged 1 to 23, with top executives willing to authorise corporate stock buybacks, but loathe to beef up their own personal portfolios. Flush with cash, companies increased their stock purchases since July, from $2 billion (£1.28 billion) to $2.7 billion a day.

Much of that treasury stock is then parlayed into bonuses for employees. It should be a relatively simple exercise to track insider holdings at EDGAR Online, a website sourced from SEC filings, that reports large shareholder transactions. Not so fast, warns Peter Vinella, formerly the president and CEO of Wilmington Trust Conduit Services.

Companies dole out equity-based bonuses to lock executives into the performance of their home firms. But equity derivatives can circumvent these incentives and the controls around them. During the 1990s, executives of recent initial public offerings were required to retain their stock for a period. Most, however, legitimately swapped out their interest sooner, selling it forward for a small price, rather than waiting years to cash out. 

Nowadays, high level insiders may not wish to be seen pruning holdings in their own firms. Because these swaps are over-the-counter transactions, they provide little transparency. “The danger is not that bonus holders are locking in profits, but misperceptions of insider positions,” says Vinella. Perhaps technicians should take official SEC insider filings with a stronger pinch of salt.