Weekly Commentary: The more things change…

August 15, 2011


“The more things change, the more they stay the same.” What we are thinking of is human behavior and how we swing between fear and greed, or as another commentator put it – panic and euphoria.  Veteran market watchers have seen the swings over and over.  We can understand these swings and aid our portfolios in the process.  Several indicators can help us in the analysis-activity of corporate insiders buying and selling, behavior of the average investor as measured by the AAII index, and changes in the ratio of put to call options on stocks.

One of the better indicators is insider transactions- a pickup in their buying their own stock is bullish.  As far as the average retail investor, a significant pickup in selling both stocks and mutual funds can be an indicator of fear or panic setting in.  The so called put/call ratio is more bullish when extreme levels of put activity or bets a stock or a market going down will occur…the chart below illustrates the S&P 500 (black line) vs. the equity put/call ratio (green line).

Whatever the sentiment, most important is knowing the value of your investment and your willingness to buck the trend when inefficiencies in pricing occur.  The classic value investor Warren Buffet recently commented that the underlying value of the market is good.  He has a rather good track record!