Corporate insiders have proprietary information about their companies. That’s why the SEC requires insiders — officers, directors and 10% holders of any publicly traded company — to disclose all trades in their own stocks. Insiders are prohibited from trading on “material, non-public information.” Nonetheless, many studies have shown there’s an insider trading “anomaly.” When corporate insiders trade in their own stock, unusual price changes are more likely going forward. So if insiders are selling stock at a record pace, maybe the stock market is poised for a drop.
Keep in mind that corporate insiders are prevented by the “short-swing profit rule” from profiting from short term trading. SEC regulations require insiders to return to their company any profits made from the purchase and sale of a company stock if both transactions occur within a six-month period. So insiders aren’t day traders, they’re long-term investors. In fact, given their intimate involvement in the day-to-day business of their companies, insiders are renowned value investors. An insider buys when his or her stock’s price is cheap relative to the company’s private market value. And they tend to sell when their stock is richly priced relative to fundamentals. Presumably, like now.
WhaleWisdom.com tallies the weekly buying and selling of officers and directors at U.S. public companies. (10% holders, considered insiders by the SEC, tend to be hedge funds, and aren’t typically privy to boardroom secrets. So their transactions are not included in WhaleWisdom’s weekly Sell vs Buy indicator.) As you can see below, the ratio of selling to buying has spiked higher in recent weeks.
Recent WhaleWisdom Insider Weekly Sell vs Buy ratios have eclipsed the highest levels since 2008.
Let’s zoom out even further, back to 2008. We can see that recent Insider Weekly Sell vs Buy ratios have eclipsed the highest levels previously attained — in Feb. of 2013 and Jan. of 2014.
Insiders sell shares for many reasons unrelated to their outlook for their company’s stock.
The problem, of course, with using insider selling as a predictive indicator is that when insiders sell stock, it’s often for reasons that have nothing to do with their expectations for their stock’s performance. Insiders may sell because they are raising cash for a purchase, paying for a child’s education, going through a divorce, etc. Also, many insiders are compensated via stock options in their companies — exercise and sale of those options does not typically imply a negative opinion of their company’s stock. Rather, the insider is essentially cashing in stock granted as employment compensation.
Conversely, insiders buy there own stock pretty much for one reason. They believe their stock is a good investment. It follows that spikes in aggregate insider selling are not very predictive. But exceptionally low insider Sell vs Buy ratios are associated with bear market bottoms and positive returns going forward.
On March 25 we published this article highlighting historically heavy insider buying.
Of course, we don’t really need data that insiders are heavily selling stock to confirm the obvious: Stocks are in a very speculative phase, with some sectors reaching bubble status. Will things end like the 1929 crash or the dot-com collapse of 2000, when the Nasdaq lost nearly 80% of its value over the course of 2 1/2 years? Shine up your crystal ball. But don’t look for aggregate insider selling behavior to offer much guidance.
Contact Mark about investing based on SEC filings and smart money disclosures.
This investment blog (the “Blog”) is created and authored by Mark W. Gaffney (the “Content Creator”). The Blog is provided for informational and entertainment purposes only (collectively, the “Blog Service”). The information in the Blog constitutes the Content Creator’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You understand that the Content Creator is not advising, and will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in the Blog may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.
From time to time, the Content Creator or its affiliates may hold positions or other interests in securities mentioned in the Blog. The Content Creator or affiliates may trade for their own account(s) based on the information presented, and may also take positions inconsistent with the views expressed in its messages on the Blog.
The Content Creator may hold licenses with FINRA, the SEC or states securities authorities. These licenses may or may not be disclosed by the Content Creator in the Blog.
Investing in the investments discussed in the Blog may be risky and speculative. The companies may have limited operating histories, little available public information. The stocks discussed may be volatile and illiquid. Trading in such securities can result in immediate and substantial losses of the capital invested. You should only invest risk capital not required for other purposes, such as retirement savings, student loans, mortgages or education.