Time to Buy? Insider Trading Might Make You Think Otherwise

I’m not much of a market forecaster. I’m content to leave that in Harry’s capable hands (if you missed his latest update on Friday, read it here). But there are definitely some tools I use to better time major purchases, and one of them is insider trading activity.

As I’ve noted before, all directors and major executives of publicly-traded companies are required to notify the SEC every time they buy or sell their own stock.

As the regulators see it – and I agree fully – the investing public ought to be informed when the people running the company are trading their own stock. If the people running a company I own are dumping the stock in their personal accounts, I would certainly want to know!

Corporate insiders aren’t expert market timers, but they are pretty decent contrarian value investors. They tend to step up their selling when their stock is expensive and the investing masses are buying it hand-over-fist. And they tend to be fairly aggressive buyers when their stock is cheap and the public is dumping it.

Of course, like many value investors, they tend to buy and sell a little too early. But if you traded when they did, you’d generally do just fine.

And what works for individual stocks tends to work pretty well for the broad market too. Corporate insiders in aggregate tend to buy aggressively near market bottoms and really lighten up near market tops.

So with that said, how does the insider picture look today?

The chart above, provided by GuruFocus, tracks aggregate insider trading next to the S&P 500. Insider buying has picked up a little during this latest spate of volatility. But it certainly hasn’t picked up to the point of suggesting that we’ve hit a major bottom. Today’s insider buying is heavier than during the “mini-correction” last fall, but it’s significantly lower than during the last real correction, in 2011.

The insiders don’t always get it right, of course. As the market started to stall out in 2007, company insiders started to step up their buying.

Considering the market proceeded to go a lot lower in 2008, let’s just say they were a little early…

But just before it finally hit bottom in early 2009, insiders went on an absolute buying spree, snapping up their own shares at what would prove to be generational lows.

All this goes to show that company insiders tend to be pretty good judges of their own stocks. Today, they are starting to nibble, as the correction has sent their shares lower. But we are nowhere near the insider buying levels we’ve seen near significant bottoms.

When you see company bigwigs backing up the truck and loading it up with their own stock, it’s time to sit up and take notice. It might not mean that the bottom is in, but there is a good chance that it is at least close. But until then, it makes sense to stay on the defensive side.