Insiders Are Less Bullish as the Market Runs up; Data Indicates Poor Macro Conditions

As the market continues its September run-up this month, insiders are buying less. Is this a sign that the market is reaching its peak, at least temporary?


Our previous research found that the aggregated trading activities of company executives are very good indicator of future market returns. Please read the previous articles

• Guru Insider Research (I): The Summary of Previous Research Results
• Guru Insider Research (II): Can Aggregated Insider Trading Activities Predict the Market?

In the second article we have found that insiders as a whole are not only smart sellers, but also insider buyers. The ratio of insider buys over insider sells can serve as a good indicator for market bottoms. As of today, insider buys are considerably lower at the market peaks.


The chart below is the monthly ratio of the number of all insider buys relative to insider sells of S&P500 companies. Currently the ratio is less than 0.2, less than half of what it was from May to Aug. At the market bottom in March 2009, the ratio was at around 1.7, more than 8 times higher than it is now.





John Hussman, the investment guru with largely avoided the deep loss in 2008, thinks the market is overvalued and overbought. The market is expected to return less than 6% a year in the coming decade. This agrees with the broad market valuation we use based on the ratio of the GDP to the total market cap. This is the chart for the predicted and the actual return of the market:





In short term, the market is overbought. This can be seen from the number of companies that are above 50-day move average. As of Oct. 5, 449 of 500 S&P500 companies are traded at above 50-day move average. A clear overbought condition!





Where will the market go? We have no idea. But as summarized by John Hussman: “Overall, our measures suggest an overvalued, overbought, overbullish condition, but with shorter term factors struggling between emerging economic weakness and overbought conditions on the negative side, and speculative trend following on the positive side. For our part, the current set of conditions is associated with an unfavorable return/risk profile.”


As value investors, this is the macro market condition we face now. We learned in a hard way that we should not ignore macro conditions. Indeed, as pointed by our user superguruand others, they have Nothing to Buy?