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WHAT IS INSIDER BUYING, AND WHY IS IT CRUCIAL TO MONITOR?

Garrett Baldwin

 

Understanding the investment behaviors of a company's top executives—those who
comprehend the nuances of its operations, financials, and future prospects—can
offer invaluable insights into its potential performance.

 

Insiders, such as CEOs, CFOs, and board members, are often privy to the
company's most confidential information. Therefore these individuals must file
with the Securities and Exchange Commission (SEC) when they buy and sell stock.

 

My radar is particularly attuned to the buying patterns of CEOs and CFOs,
specifically transactions exceeding $100,000. Such purchases are often an
indication that these top executives perceive their company's stock is
undervalued looking out over the next 6 to 9 months.

 

Why focus on the CEO and CFO? The CEO has a grasp on the company's future, and
the CFO understands its financials and potential stock valuation. If their
company’s stock price dips below their estimated value, they buy stock with
their personal capital, and then file a Form 4 document with the SEC, which we
monitor and report each premarket at Flashpoint Trader.

 

Generally, I look to trade around insider activity in a positive momentum
environment, although this year has made this strategy difficult. However, it's
essential to remember the long-term trend of the market - higher highs and
higher lows.

 

Companies like Plains GP Holdings (PAGP), a AAA pipeline company, and Albemarle
(ALB), a lithium company, have experienced significant insider buying in the
last ten days. Tyson Foods also had a half-million-dollar insider purchase .
When considering stocks for long-term ownership, these companies become
compelling examples.

 

For instance, Albemarle is likely to perform well in the future due to
increasing lithium demand from the green energy push.

 



 

When a CEO or Chairman buys stock, it's a safety net, investing their money at a
price they deem valuable. As Peter Lynch said, insiders buy because they
anticipate their stock rising. This sets up the foundation of a trading
strategy. If the stock price drops, view previous insider levels as potential
buying points. Then, once the market stabilizes, confidently buy, knowing
executives invested at those levels.

 

Consider another strategy: selling put spreads 10-15% below the executives'
buying level. If the stock's price dips, you're ready to buy. But, if it bounces
back, you gain from the put spread's devaluation. As the stock's value rises and
the put’s price drops, you can close the position, pocketing the premium.

 

I SHARE SIGNIFICANT INSIDER BUYS DAILY IN MY PREMARKET REPORT

 

In the tumultuous wake of the banking crisis, the market has been on a roller
coaster ride since February, with the financial and energy sectors bearing the
brunt of the volatility. Negative momentum by definition means more sellers than
buyers, but it can get out of control when institutions decide to all sell at
once.

 

We've witnessed significant market downturns before - a 20% drop in 2020 and a
staggering 33% plunge in December 2018. The COVID crisis is a case in point
where it was only prudent to buy when the dust settled around April 7th.
Interestingly, it is during such periods of pronounced negative momentum that
executives often dive in to scoop up stocks, betting on the market bottom.

 

As of now, in the current crisis, we've seen no such insider buying frenzy.
However, stay prepared for a potential spike once there's a renewed sense of
confidence in the economy's future.

 



Executives, particularly those running hedge funds, often invest a lot of money
to stay ahead of policy changes in Washington. They pay close attention to
fiscal policy and potential moves by the Federal Reserve. They're also on the
lookout for any behind-the-scenes meetings between financial officials and other
agencies that may need to provide liquidity support. They use this information
to perfectly time their purchases, often at the market's bottom.

 

For instance, how else could so much insider buying have occurred in early 2020,
amidst the peak of uncertainty surrounding COVID? It was because they had a
strong hunch about a major shift in monetary policy. And sure enough, the
Federal Reserve announced that it would inject trillions of dollars in liquidity
into the system.

 

Therefore, keep a close eye on the chart above, which we summarize in our
morning brief every day. If we see a significant uptick in the near future, it
could hint at smoother market conditions and improved liquidity on the horizon,
in other words- Risk On!

 

 





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