This Trading on Insider Information Is Completely Legal!
by J. Christoph Amberger
Market movements, both upward and downward, are products of collective human activity, activities occurring according to patterns with analogies in nature. As such, they can be monitored and (to a certain degree) predicted with reasonable accuracy.
If you apply this concept to single stocks rather than entire markets, this human behavior leaves its traces in the daily data flow, data that can be collected, compiled, and collated. Daily, weekly, monthly prices can be analyzed using Japanese candlesticks (more on that later). Applying mathematical formulas, you can manage your analysis of long-term trends using moving averages. Putting earnings and dividends into the equation, you can obtain P/E ratios and other standard analytical goodies that are the foundation of all the typical indicators.
The most obvious track human behavior leaves in the daily data flows of a stock is trading volume. Low trading volume typically signals modest public interest in a stock, which means that expectations for a gainful move on the upside (or a loss-generating move toward the downside) are low. If trading volume is high, there are plenty of people around buying and selling a stock. Major moves typically accompany volume spikes: If lots of people are buying and the demand to own a stock is high, the price typically goes up. If multitudes of investors are selling and the supply of their stock exceeds the demand from new buyers, the price takes a dive.
Everybody knows that.
But in the mid-1990s, we something odd. In a handful of cases, stocks exhibited a different behavior. Trading volume in some stocks increased dramatically, seemingly without reason. And the price remained fundamentally the same until it suddenly took off a few days or even weeks later.
There was no earnings report released and none due for several weeks. In fact, there was no announcement, no news of any kind. Oddly enough, volume sometimes more than quadrupled. Why? My associates did some digging and found out that the company had been sitting on several patents pending for a topical and noninvasive drug delivery system to treat impotence. And approval was scheduled to arrive any day now.
The spike in volume told us that two things were highly likely: First, a decision had been made, and second, approval was imminent. As word leaked out, people close to the situation—insiders—began snapping up shares.
None of us were in that insider loop. But actually, we didn't mind. Neither did the members of our Volume Spike Alert trading advisory. To us, this volume spike was as good as insider information. Even better. It was based on publicly available information and as such, trading on the information was perfectly legal.
Please understand: There's more to picking a winner than just volume. But even in the deadbeat markets we experienced between 2001 and 2004, the volume spike indicator proved to be outrageously useful.
Now, in reading the preceding paragraphs, you may have stumbled over the repeated use of the terms insider and trading. But before you go out and call the Securities and Exchange Commission (SEC) to check out this Amberger character who seems to be taking liberties with the law, let me emphasize that insider trading is illegal in the United States. But one thing is sure: it happens all the time. And just to keep the lawyers and editors reviewing my manuscript from fidgeting, let me stress that I'm not talking about doing anything illegal ourselves. We do our homework and spot what insiders are doing with the stock and then draw our own conclusions—without access to any information that is not also available to the general public.
It is considerably different when true insiders make decisions based on something they know that is not available to the average investor.
The advantage insiders have is access to information not yet made public. That's why true insider trading not only is unfair; it's also against the law. But you don't have to break the law to get a real advantage over most investors. Imagine yourself using legal information generated by our first trading secret, and raking in enormous profits of 50, 100, or even 500 percent, while your neighbors and associates get eaten alive by Wall Street sharks and corporate thugs. The volume spike indicator does, indeed, give you a rare advantage. And it's legal.
This presents you with a choice. You can whine about corporate insiders using inside information to get rich. Or you can find a way to use the inside information yourself, without breaking the law. That's what the volume spike indicator is all about: following the trail of the insiders—and using it to make a profit without breaking any laws.
How The System Works
Let me tell you more about how the system works. First of all, our research team focuses on roughly 1,000 lesser known small-cap high-tech and biotechnology companies with the most potential for breakthrough deals and announcements. These typically are young companies whose energies are focused on new products and new discoveries. But these are just the kind of organizations where information leaks are most likely to occur—since they're typically small companies with relatively loose corporate structures. And because volume is generally light, any sudden surges are very noticeable.
As I said before, this kind of insider trading happens all the time. It's not supposed to. But information has a way of leaking out. Confidential memos get seen. Printers read prepress reports. A friend helps a friend. A PR jockey shoots off his mouth in an unobserved moment. A needy in-law gets a hot tip. Next thing you know, there's unexplained volume activity surrounding a once-quiet stock.
When we see a change in volume, we look for reasons. But as I said earlier, there's more to it than just watching volume. At the first sign of unusual volume activity, we look to see if there's any current news on the company—earnings, product announcements, coverage, upgrades, downgrades.
One of the first things we do is check out the company's transaction log. If it's made up of a lot of small in-and-out trades, this usually means day traders are driving the stock. We stay clear. After all, the companies best suited to volume spike trading tend to be smaller-cap stocks. That means it doesn't take a lot of volume to drive the prices very high, very quickly. That's not the way we want to profit. We want to get in with the insiders at "controlled" prices and let the market take the stock upward when imminent news goes public.
When we see a handful of 5,000-to-10,000 block trades, this usually means that some big hitters are trying to accumulate shares quietly and without pushing up prices through large block orders. That's a sign something's stirring. So we look deeper into the company to find out what's happening behind the scenes.
Interpreting the Changes in the Trend
Does the company have a new product? Does it have any patents pending? Is it up for any special licensing agreements or FDA approvals? Has it been in any long-term negotiations concerning major deals? You have to do some footwork to get these answers. You can't just call up the publicity director of the company: These guys are as reliable as used-car salesmen and will do anything that benefits the company (and of course, the insiders).You knowing ahead of the general public is not on their priorities list.
Once we discover insider movement signaled by the telltale volume spike on a stock, it is absolutely crucial to act quickly. This activity usually means stock prices are ready to take off—usually in a matter of days. The same holds true when it’s time to get out. The kinds of stocks that create insider activity are also the kinds of stocks that can fall in a flash. It's absolutely important you get out when the profit run is over. Don't get greedy. Don't try to squeeze every last dollar out of the trade.
The average holding time for Volume Spike Alert positions is less than six months. That means following the volume spike indicator is purely a trading strategy. It's not a buy-and-hold portfolio decision. When a volume spike arises and the research checks out, ride it until you see signs that the fervor is fading. Then get out with whatever profits you may have. Trading on volume spikes requires you to employ a stock trader's most powerful weapon: discipline.