Buying on weakness. It's something that many investors may have heard mentioned before.
Investopedia defines buying on weakness as:
A proactive trading strategy in which a trader takes profits by closing out of a short position or buying into a long position. This strategy is used when the price of the asset being traded is still falling but is expected to reverse and move against the trader. This is the opposite of "selling into strength".
Further they explain:
For example, let's say that a trader believes that ABC stock will fall below $5 to $4.50 before rising above $5. Therefore, the trader would buy into the weakening stock price at a price below $5 and wait until the falling trend reverses and the price rises before selling and taking a profit. A short seller may also buy weakness by closing out his or her position. This would be done by buying into a falling stock with the anticipation that the stock price will soon reverse and start to rise.
Many traders will wait for confirmation of a change in price movement before reacting. However, by the time a reversal is confirmed, it may be too late and the trader may end up losing. Thus, by trading against the prevailing trend in the anticipation that it will soon reverse, the trader allows him- or herself greater room for error. As the saying goes, "missed money is better than lost money".
I believe money flows into and out of a stock, and likewise the indexes, are important measurements to take into account along with one's own fundamental analysis to gauge sentiment in your investment as well as the overall market. By watching money flows, and coupling them with how the share price moves on a given day, investors can sometimes pick up on whether or not the current movement has some weight behind it or if it appears to be nothing more than smoke and mirrors.
So how can this be applied to the current market atmosphere and more specifically an investment in Sirius XM (NASDAQ:SIRI)? With share prices falling across the board, is this a sign of doom and gloom ahead or are traders snapping up shares and accumulating despite falling prices?
|Date||Gain / Loss||Money Flow ($ millions)|
It's fairly easy to see that money flow has been overwhelmingly positive into the S&P 500 in the past week, despite the sharp downturn that has been experienced. Money flow is not confirming the market weakness, and is signaling that despite the sharp downturn, investors are not being fooled and seizing the opportunity to buy shares at a discount.
This is not particularly surprising to me, given how quickly the market has dropped and the apparent immediate reasons for it which is likely a reaction to the presidential election.
When examining the money flow figures for Sirius XM:
|Date||Gain / Loss||Money Flow ($ millions)|
Again, it's easy to see here that money flow has been remarkably positive for Sirius XM even despite some considerable declines in share price over the last week. It appears that buying on weakness is in full swing, and that investors are not being fooled by the recent run down in share price.
What's even more remarkable in the case of Sirius XM is the fact that insiders have had very large quantities of net sales in the past week. Consider the SEC filings here.
|Insider Name||Dollar Value Of Sale ($ millions)|
|Meyer, James E||25.88|
|Holden, James P||00.35|
|Greenstein, Scott A||19.67|
All sales were performed from 11/5 to 11/7, and yet money flow remained positive. Such sales should typically result in a net negative flow of cash yet on each day these sales were made there was still a net positive cash flow despite a decline in share price. I think that's a rather important thing to consider in the case of Sirius XM. Had these sales not gone through, cash flows may have been even higher than the figures recorded. Buying on weakness? It appears so.
At this point investors might be asking if there should be any concern with these insiders selling. I say no, absolutely not. The current management team at Sirius XM have been selling their shares all year as can be seen in the SEC filings, and it is well understood by those invested in Sirius XM that the current team may be on its way out due to Liberty Media's (LMCA) move beyond 50% control pending FCC approval. CEO Mel Karmazin has already announced he will be leaving in February. It's perfectly reasonable to expect departing management to sell their interest in the company.
So how do investors process this data going forward? Consider the overall market, and what seems like a very sharp and rash bout of senseless reactionary selling. Consider that the overall market has seen buying on weakness. Now consider Sirius XM, the company's current performance and expected strength on the back of increasing auto sales. Consider that Sirius XM has also been subject to the recent bout of overall market selling. In the face of both that and a very large amount of insider sales within a short period money flow has been positive into Sirius XM every single day for the past week.
I'm comfortable with my long position in Sirius XM. With Liberty Media needing to purchase more than 200 million more shares to go to and retain control, and with share buybacks on the horizon, I can't see any reason to be bearish on Sirius XM. I would wager that this downturn will be short lived, and rebound in healthy fashion. That's why I will be seeking to add to my position in the coming sessions.
Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.