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Charts & Analysis

Insider Buying: Not quite bullish

Bloomberg thinks insider buying is no longer bullish, but is actually indicative of a decline to come.

Insider buying, a bullish signal for two decades, lost its prescience this year and now may be a harbinger of a retreat in shares because it signals overconfidence, according to Ben Silverman, director of research at InsiderScore.com, a stock tracking firm in Princeton, New Jersey. The last time officers bought as much was in March 2008, preceding a drop in the S&P 500 a month later, data compiled by Bloomberg show.

“Everyone’s drinking the Kool-Aid,” said Michael Levine, a money manager at New York-based OppenheimerFunds Inc., which oversees $160 billion. “These guys know their companies better than the market, so they think they’ll be right. But the economic slowdown has happened much more quickly and has been much deeper than people expected.”

Isn’t this happening in India too? Insiders are buying left, right and center – as noticed in the NSE announcement pages everyday. In companies like Praj Industries, promoters have bought a significant percentage of shares – as I noticed yesterday – but the signs are of ultimate bearishness – the stock’s close to 52 week lows and has lost over 70%: it’s at 65, versus a 52 week high of 270.

This is interesting – and makes some sense. That employees or founders understand their business well, but not the market. That the market can become unviable is anathema to most promoter minds, and even that of employees – in fact even today, many people in the IT sector believe all in hunky-dory in outsourcing-land.

Some promoters will of course be proved right in buying – but will the vast majority do? I have not seen as much bottom-calling as I have seen last week, which means we still have miles to go?

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