Insiders Are Sending A Pretty Clear Signal about The Stock Market (And The Economy)
The comments below are an edited and abridged synopsis of an article by Jesse Felder
It’s critical to be aware of insider buying and selling. Nobody knows more about the bullish/bearish developments of a business—and its valuation relative to those developments—than the company’s top executives. While insider activity may sometimes be a good indication of future price movements in individual stocks, in aggregate it doesn’t have any meaning at all. While insider buying may be predictive, insider selling is not; and both of these positions are contradicted by the data.
Nejat Seyhun, Professor of Finance at the University of Michigan, says the aggregate selling-to-buying ratio over certain periods of time has a good track record of predicting future returns in the stock market. Not only are insiders better market strategists than those on Wall Street, they are also better economists.
This makes sense. Who has a better read on both the stock market and the economy than top executives, who have the confidence to not only make a public forecast but also put their money where their mouths are?
As to those who say, ‘there are many reasons for an insider to sell; there’s only one reason to buy,’ Seyhun says that both purchases and sales are 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.”
This has played out over the past year. The aggregate insider buying just over a year ago has proved prescient as to 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 shows that top executives, directors and 10% of shareholders have rarely been as aggressive in selling, or disinterested in buying, as they are today.
This relative bearishness on the part of insiders suggests that stock prices are likely to fall over the next year or so. On top of that, the economy could begin to disappoint. Don’t say they didn’t warn you.