Insiders Sending Pretty Clear Bearish Stock Market Signal
One of the most important market indicators is insider buying and selling. Quite frankly, no one knows more about the bullish and bearish developments of a business and its valuation relative to those developments than the top executives of companies. They are the ultimate insiders.
Many stock traders and investors make their entire buy and sell decisions on insider buying and selling activity. Those who insist on buying and selling shares by insiders are a good indication of future price movements in individual stocks.
Nejat Seyhun, Professor of Finance at the University of Michigan, the author of the book Investment Intelligence from Insider Trading, writes that the aggregate selling-to-buying ratio over specific periods has a very good track record at predicting future returns in the stock market…
“Aggregate insider trading predicts aggregate stock returns. Furthermore, Aggregate insider trading predicts changes in future economic growth up to two years ahead.”
This would lead to the view that not only are insiders better market strategists than those on Wall Street, they are also better economists.
After all, who has a better read on both the stock market and the economy than the amalgamation of those top executives in the country with the confidence to not merely make a public forecast but actually put their money where their mouths are?
Yet many insiders sell not because of inside information they have but to pay bills, college tuitions, buy homes, and diversify their portfolios to not have all their eggs in one basket.
According to Mr. Seyhun….
“…both purchases and sales seem to be informative. The future stock price movements following insider purchases exceed the average stock price movements. Also, the future stock price movements following insider sales fall short of the average stock price movements.”
We’ve seen this play out over the past year. The aggregate insider buying just over a year ago has proved to be a very good signal for the direction of the stock market, the leadership of the rebound in stock prices, and the turnaround in the economy so far.
However, recent data as provided by InsideArbitrage.com shows that top executives, directors, and shareholders with 10% or more ownership in companies have rarely been as aggressive in selling or disinterested in buying as they are right now.
So when one considers Mr. Seyhun’s tracking, the buying and selling of insiders at this time is bearish in aggregate and suggests stock prices are likely to fall short of euphoric expectations over the next year or so. Some analysts insist that the economy could begin to disappoint in a similar time frame.
Insider Trades Update): Insider Sold $450 Million Of This Stock