Insider Buying: Another Great Way to Spot Overreactions

Oftentimes, one of the best ways to spot overreactions to news is by paying attention to technical pivot points. 

For that, we typically rely on Bollinger Bands (2,20), MACD, relative strength (RSI), and Williams’ %R (W%R). In fact, when each of those indicators aligns with the others, you can call the bottom of a stock up to 80% of the time. 

Another great way to spot opportunity is by paying attention to insider activity.

After all, who knows the company better than an insider – the CEO, CFO, COO, officers, employees, and directors? If they’re buying a sizable number of shares, it’s often a good idea to start looking into why and perhaps follow them into the stock. That’s because they’re typically privy to information on new products, competition, and the operating environment of the firm. 

We have to consider that insiders who are buying their stock would not put up their own money unless they believed the move would be profitable. Of course, it’s not always wise to base your own buying decisions solely on the actions of insiders.

But it can help guide your next investment decision.

Look at Kroger Co. (KR) for example.

For most of 2019, the stock has been a slow-motion train wreck that sunk from $29 to $21.60.

While many traders may just avoid a stock that looks like this, look at what the technical pivot points were telling us as of July 2019. Not only did the stock catch double bottom support at $21.60, it was also excessively oversold on RSI, MACD, and Williams’ %R.

That’s a good giveaway your stock in question may be oversold, and worth watching. Another giveaway is insider buying. The stock got so cheap (P/E of 9.5) that one of the company’s directors bought 5,000 shares at $21.49 a share. 


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Now, Let's Look at Carnival (CCL).

 

Investors reacted poorly to the company’s second quarter earnings report, which included another guidance downgrade. However, it appears the pullback in CCL is overdone. Even company CEO and President, Arnold Donald believes so buying 22,000 shares around $45.31.

At the same time, look at how technically oversold it became.

Not only was it at double bottom support, RSI, MACD, and Williams’ %R were oversold.           

While technical analysis is a great way to spot opportunity, studying the fundamentals and insider activity of a stock can be of great help, too.

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