Short-term Outlook (1-5 Days):  Neutral  Since July 20, 1057 SPX

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Equity Indicators - Updates and Extremes

InsiderScore.com Buy / Sell Ratio

After meandering around with no particular direction, corporate insiders have decided to pick up their buying.

According to InsiderScore.com, those most in the know about their companies' prospects have started to buy notably more stock than they're selling.  The result is the most extreme Buy / Sell Ratio since March 2009.

Obviously, that looks like it would be a good sign for the market.  Perhaps it's good news that despite the S&P being nowhere near May's lows, insiders are already more eager to buy now than they were then.

While the spike in insider selling a year ago didn't presage any kind of decline and was a wickedly false signal, for the most part extremes in insider activity have been a very useful guide.

So that leads us to the question of whether this week's reading really is at an extreme.  Surely, we're seeing the most buying (relative to selling) in a year and a half, which is probably good news...but if we zoom out, then it becomes obvious that buying is nowhere near previous extremes.

The current reading of 0.1 is just barely better than neutral.  In order to see a truly bullish extreme, the ratio would need to get to at least 1.0, and preferably 2.0.  Based on insiders' history, it's going to take a long time and/or a major decline in the market to generate that kind of buying interest.

ISE Sentiment Index

A while back, the ISE Exchange broke out their aggregated options data between options traded on equities and those traded on indexes and ETFs.  That made their data more useful, since index data tends to be less effective as a contrary indicator than equity-only data.

Yesterday, there was a wide disparity between the two.  Granted, this is likely due to option expiration games as we near the September expiry, but still it's worth taking a peak at prior times we've seen this occurrence.

The ISE expresses its data as a call/put ratio, and yesterday the equity-only ratio was an exceptionally high 256 (meaning that 256 call options were bought for every 100 put options).  At the same time, the index-only ratio was a lowly 29, meaning that only 29 calls were bought for every 100 puts.

At its most-basic level, that would suggest that equity traders were extremely bullish while index traders were extremely bearish.

The difference between the two of 227 (256 - 29) is abnormally large.  The table below highlights the S&P 500's performance going forward after other times the difference exceeded 225.

In the very short-term, there didn't seem to be much of an impact.  But when we look out over 3-5 days, that's when we see that it was difficult for stocks to maintain much upside.  While the declines weren't necessarily large, they were consistent, and when there were gains, they were almost invariably given back.

Usually, the extremes clustered in a group during a two-three week time frame, and that is what preceded several of the most significant recent declines.  So this will be something to watch in the weeks ahead, to see if we get more readings like we saw yesterday.

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