Insider ETF Mimics Market In Bear, Crushes Market In Bull

| About: Guggenheim Insider (NFO)

The Guggenheim Insider Sentiment ETF (NYSEARCA:NFO) has been around long enough to demonstrate its chops. During one of the worst downturns in U.S. history (10/07-3/09), both NFO and the S&P 500 SPDR Trust (NYSEARCA:SPY) reached a similar bottom at a similar pace. Buying-n-holding either one of these exchange-traded trackers was a recipe for ridicule.

During the bull market that began in March of 2009, however, NFO garnered nearly 90% more than the S&P 500 SPDR Trust. That is nine thousand basis points of outperformance… no small task for a diversified vehicle.

What shouldn’t be lost in the selective charting, however, is the depth of NFO’s declines in monster sell-offs. For example, SPY fell roughly 19% in the 2011 summertime downturn, while the Insider Sentiment ETF plummeted nearly 30%. The difference in recovery percentages? An investor in SPY required 23.5% to recover whereas an investor in NFO required 43%. In that manner, an 1100 basis point decline differential is really a 1950 basis point recovery differential.

Why is it important to discuss drawdown percentages? For one thing, one cannot always count on a speedy recovery. If there are periods when it may take 4 years or longer to see stocks log a 43% total return, then allowing an asset to register -30% over a few months is ludicrous. Stops, hedges and trendlines should be tools in your risk management shed.

Secondly, nobody can predict the duration or magnitude of a stock market bull or a stock market bear. It follows that, in spite of the above-mentioned charts that favor NFO over SPY, the time in which you are invested is all that actually matters. If you were unfortunate enough to own NFO in the 18-month period from 7/1/11-12/31/12, you would have come up far short of SPY.

In other words, whether one holds an asset for 3 months, 6 months, 1 year, 18 months, 2 years, 5 years or 15 years, there will be a time horizon that determines your fate. You have to control that fate; you need to take charge of that outcome so that you only experience a big gain, small gain or small loss… never a big loss.

Keep in mind, I am a fan of what the Guggenheim Insider Sentiment ETF sets out to achieve; that is, the fund sponsor chose to focus solely on insider buying trends. Why? Historical research clearly demonstrates that insider buying, not selling, can be a relatively robust indicator for overall market returns. Indeed, insiders tend to buy for one reason alone… to make money. Yet insiders often sell for scores of personal and professional reasons that do not tend to be as indicative of market direction.

By the same token, a fund that tracks an index tied to insider buying trends (via public filings) requires you to “time the timers.” And right now, executives have bought less stock that at any time since April of 2012. For what it’s worth, the last time that buying interest was this lackluster, the stock market corrected 8%+.

So here’s the way I might “time” it. Insiders haven’t been huge purchasers of corporate shares since May of 2012 came to its sell-in-May conclusion. I would wait to see that kind of interest by insiders/execs once again before committing to Guggenheim Insider Sentiment ETF.

By acquiring shares when others were selling in May of 2012, insiders have profited immensely from the post May-June gloom bullish turnaround. They bought low. However, buying low doesn’t guarantee that the markets won’t move substantially lower. So even when you get a month when insiders are buying by the billions instead of millions, you still need stop-limit loss orders to protect against a bearish collapse. (Remember, insiders weren’t all that prescient in the 2007-2009 disaster.)