Sentiment Analysis September 2010: Dark Clouds on the Horizon

It is said that rats are the first to leave the sinking ship. This is not because rats are generally perceived as repulsive, but because they are simply pretty smart creatures. So maybe the revulsion is partly due to awe. Whatever the case, there can be nothing wrong with watching the rats as the ship steers through troubled waters.

Conspicuous capital outflow

Insiders are very smart players on the markets. Each of them knows only the niche of their company, but they know it better than anyone else. In their totality, the insiders therefore create a very interesting set of data. That is why we compile this insider sentiment analysis for the Insider Alert every past month. One phenomenon was particularly striking in September: the outflow of capital on the part of insiders. And this did not occur too scarcely!

We recorded 54 insider transactions in September according to our filter criteria, of which 30 were purchases and 24 sales. However, the purchases only reached a cumulative volume of 4.97 million euros, while the sales amounted to 36.26 million. In percentage terms, therefore, this distribution is 88:12 in favor of sales. That is quite a striking phenomenon!

DAX in choppy waters

In recent months, the overall market has been in choppy waters. The DAX fluctuated very volatile, without any sustained gains being recorded. At the same time, it is still doing extremely well in an international comparison. Comparable indices from Switzerland, Japan, Great Britain or the USA tended to lose ground or were quoted further away from their highs for the year to date. From a correlation point of view, the DAX thus stands tall.

Favorable selling rates used

One should not always paint the devil on the wall, but on the part of the generally recorded insider behavior, one can speak of dark clouds on the horizon with the past month. The cautious and selective purchases in small doses cannot outweigh the sometimes extensive liquidations of large positions. In selected cases, these also exceed the level of profit-taking, in some cases very large positions were withdrawn - at equally favorable selling prices, if one compares the corresponding charts.

Market facing new slump?

The DAX is still above the 6,000 mark, but who knows what new symptoms of the ailing global economy will soon become visible? Investors from all over the world are fleeing into gold, which recently reached ever higher record prices. Money is cheap and stimulates purchases on the stock and commodity markets, but in this environment even a small stone can set an avalanche rolling.

Whether the insiders really link their actions to weakened business prospects is not that important. But it is definitely certain that the majority of them took advantage of the recent rise in September prices to get out. So the confidence in further rising quotations is no longer necessarily given, or at least it is no longer worth the risk of a sure profit. All in all, one is still broadly invested after the market bottom in 2009, no question. As I said, this could only be a first sign.

Latest innovation: The IAS indicator

To better illustrate the data, we have now developed the IAS indicator for you. IAS stands for Insider Alert Sentiment. It is composed of a secret formula that is intended to visually summarize the data described here, i.e. the number of purchases and sales as well as the inflow and outflow of capital. We have calculated the data back to the beginning of May, point 0.

Conclusion

As you can see, the indicator has been subject to similar fluctuations this year as the overall market. Definitive insights into its predictive power will probably only come after a few more months and years, but for the immediate future it provides a clear picture: September brought significant losses and pushed the IAS indicator into negative territory for the first time. So it remains to be seen how the fourth quarter will play out on the market. Insiders, at least, are skeptical about it.