Stocks dropped hard on Thursday after investors learned from government reports that jobs are getting scarcer than straw hats in a wind tunnel, and it isn’t always sunny in Philadelphia. Then the bad news continued this morning, with even more trouble on Wall Street.
The sell-off was severe enough to classify as a 90% downside day on Thursday, with down volume representing 92% of total volume on the NYSE. The last similar episode was the 97% downside day on August 11. The fact the bulls couldn’t mount a more significant charge in the wake of that wash-out is a very negative signal that lower prices are still needed to encourage robust demand.
But from an analytical standpoint, this conclusion is far from a slam dunk. According to the veteran volume analysts at Lowry Research, the losses on Thursday were once again the result of a withdrawal of buying interest rather than an increase in selling pressure.
This continues a theme that’s developed over the past few weeks: The decline was more about potential buyers being standoffish rather than about a mad rush by sellers to dump stocks. Of course there is always one buyer for each seller. The difference between rising and falling markets is that in bullish spans, shareholders try to hold onto their shares and bidders have to offer incrementally more to pry them loose. In bearish spans, it’s holders that are more aggressive as they try to get rid of their shares and have to accept incrementally less to entice buyers.
In the current case, a relatively small number of shareholders are trying to sell and, meeting with indifference from buyers, they’re forced to offer a bit less. The reason we make this distinction is that it often doesn’t take much to turn this sort of aloofness around. As long as holders aren’t outright throwing their shares on the market, the psychology of a week like this can reverse relatively quickly when buyers suddenly find their appetites whetted by lower prices.
With much of Wall Street out on vacation, who’s been doing all the buying? New evidence suggests its corporate insiders — the people who theoretically know the most about their companies’ prospects. According to InsiderScore.com, net buying by insiders has increased to the highest levels seen since March 2009 when stocks were first finding their footing after a two-year meltdown.
So this is good news, especially with stocks still off their July lows. Yet as shown in the chart above, insider buying is nowhere near the extremes reached back late 2008 or early 2009. And if you look closely insiders were also buying avidly in late 2007 and early 2008 just ahead of disaster. But still, this factor brightens what is otherwise a rather dark picture.
If a turn is about to happen, I continue to favor semiconductor stocks since they tend to be the first to move during a market rebound. And despite being very sensitive to broad market movements, the group held up surprisingly well during Thursday’s selloff. Semiconductor equipment maker Kulicke and Soffa Industries (NASDAQ: KLIC) is my favorite pick right now.
Disclosure: The author does not own or control a position in any company mentioned.
Be sure to check out Anthony’s new advisory service, the Edge
, which is launching in September. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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