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Insiders

May 23, 2012 – 5:01 pm

For years professionals and individual investors have been watching the buying and selling of stocks by the insiders to try and gauge the future direction of the market. Generally, if insiders are buying it is assumed the market will rise and if they are selling the market will fall. There is a ratio for this activity and the average ratio over long periods is 2 to 1 to 2.5 to 1. In a recent article by Mark Hulbert he pointed out that in March and April that ratio spiked up to as high as 6.56 to 1 and then in recent weeks, as the market corrected, it collapsed to 1.63 to 1. A high ratio would mean insiders are selling their company’s shares and low ratios mean they are either holding them or buying them.

To try and ferret the truth of these assumptions he refers to a professor Nejat Seythun who has studied corporate insider behavior for years. His conclusions are interesting in that he says insider selling is often meaningless in trying to determine the future direction of the market but insider buying is very different.

Selling may just reflect the insider’s desire to capture profits for stocks awarded to them as part of a pay package. Whereas when an insider buys stocks or refuses to sell them when their company’s stock price is weak it very often precedes a market rally. However, there are times when selling by insiders is meaningful and that is when their stock prices are weak indicating a future weak stock market.

In recent weeks insiders are buying or at least holding their shares as the market corrects. The ratio is far below the average. This is apparently bullish if this professor’s studies are to believed.

I note that nowhere in Mark Hulbert’s article or in his review of the professor’s work did he give a time frame as to when we might see the beginnings of a new rally. We can only take comfort in that insiders are feeling pretty good with this recent market weakness.

Good Trading
Steve Peasley

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