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Guru Insider Research (II): Can Aggregated Insider Trading Activities Predict the Market?

July 08, 2010
insider

gurufocus

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In the first of our Guru Insider series, we summarize the previous research results for insider trading activities. Most of the reports were published before 2002, which is the year that SEC adopted new rules and amendments to Section 16 of the Exchange Act, implementing the provisions of the Sarbanes-Oxley Act of 2002 that accelerated the deadline for filing most insider ownership reports. Insiders are required to report to the SEC within two business days of their trades.

Since June 30, 2003, Insiders are required to submit their forms electronically. GuruFocus insider data starts from Jan. 2004. The research results in this series are for the insider trading activities from Jan. 2004 to the latest data.

Please note GuruFocus only tracks the insider trading activities in open market. That is, we only consider the buys and sells of their own company stocks by insiders at the market prices. Activities such as option exercises, private placement at non-market prices etc are not considered in this study.

Insiders are Smart Sellers



As pointed out in the last paper, previous studies found that insiders are mostly value investors: Insiders are found to be net buyers of relatively low P/E stocks and net sellers of relatively high P/E stocks; insiders tends to be contrarians, that is, they tend to sell more when market buys and buy more when market sells.

insider_macro_ceo_sells.jpg

Our study continues to support this conclusion. The chart below shows the aggregated monthly number of total CEO sales since 2004. We found that using the total number of selling activities instead of total number of shares sold or total amount of money involved provides a clearer picture of insider activities.

The S&P500 is also shown in the chart for comparison purposes. Interestingly, the envelope of the CEO sells chart has a very similar shape to the S&P500 chart. CEOs sold the most at the market high of 2007, and sold the least at the market low from Oct. 2008 to April 2009.

Insiders are also Smart Buyers



Not only insiders tend to sell less at the market lows, their aggregated buying activities pick up as the market declines. The chart below shows that the buying activity picks up from 2008, reached the peak in Nov. 2008, stays high until May 2009.

insider_macro_ceo_buys.jpg

This clearly shows that even as the market panicked from Oct. 2008 to March 2009, CEOs were not scared by the market. They kept confident on their own companies and bought more shares at the market sell-off. These purchases are rewarded greatly in the months to come. The detailed results will be presented in the upcoming articles.

Can Aggregated Insider Activities Predict the Stock Market?



When we draw the ratio of the aggregated monthly number of insider buys over insider sells, we get the chart below. Most of the times the ratio stays less than 0.3, which means that insider buying activities are less than 30% of the selling activities. However, the ratio picks up in 2008, by Oct. 2008, it is at 1, and peaked in Nov. 2008 at 2.4, and stays here, and peaked again at 1.9 in March 2009.

insider_macro_ceo_ratio.jpg

This chart shows that the ratio can serve a very good indicator for locating the market bottoms, which apparently can be very profitable for investors.

GuruFocus will develop a new page which shows the ratio in real time. It will serve a good indicator if the market panics again.

How about Other Insiders?



The charts we have above are all for the buying and selling of CEOs. How about other officers like CFO or directors?

insider_macro_cfo_ratio.jpg

insider_macro_dir_ratio.jpg

Our study shows that they have similar behaviors as the CEO charts. Below shows the ratios of the monthly aggregated buying activities to selling activities of CFOs and Directors. We can see that all of them can serve as good indicators of market valuations. The CFO charts are very similar to that of CEOs. For Directors, the buying/Selling ratio is higher overall, which means that directors buy more shares relative to the shares they sell.

Conclusions



Our study with the latest insider data since 2004 clearly confirms the previous conclusions: insider as a whole are smart investors of their own companies. They tend to sell more when the market is high, and buy more when the market is low.

The aggregated activities of insiders can serve a good indicator to locate the market bottoms. GuruFocus will create a real time insider activities chart for Premium Members. If you are not a Premium Member yet, we invite you for a 7-day Free Trial.

About the author:

gurufocus
GuruFocus - Stock Picks and Market Insight of Gurus

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Comments

DanU
DanU - 4 years ago
One of the reasons why some people are being involved in insider trading, it's because of the greediness to be rich and have power. There have been several people who have arrested for doing such wrongdoing. We quite often hear tales of high powered professionals taking advantage of their positions; and if you are like me you might question why somebody would do something so stupid when they already have a cozy job and lifestyle. Danielle Chiesi is probably the most recent case of somebody hurting their business in the interests of themselves; she has been arrested on charges of insider trading. Basically with insider trading individuals have the benefit of knowing whether or not to sell or buy stock before the remainder of the public, making it an unfair game.

I found this here: Danielle Chiesi on trial for insider trading

gurufocus
Gurufocus premium member - 4 years ago
While there are certainly illegal insider trades, but most of the insider trading activities are legal. Insider sells for the purpose of liquidity and diversification. Study shows that insiders buy based on long term perspectives of their companies.
dpradeep73
Dpradeep73 premium member - 2 years ago


Insider Trading is illegal only if the information is ma.) Material b.) Non-Public. It has to be material because 'I bought erasers or pencils for the company' is information that outsiders done know about but it is not important to the valuation of the company. Once "materiality" is established, it has to be "secret" information that nobody else knows off. i.e..It is non-public because of which insiders can unfairly benefit. Once the information has been released to the public the insiders can trade on the information. This is perfectly reasonable and logical.
poolgmac
Poolgmac - 1 year ago
NOVC insiders are buying right up to black out period June 30th. They are changing three billion dollar markets

5B residential appraisers www.streetlinks.com that is mandated by Dodd Frank Act. Gross Revenue grown from 35M in 2009 to 178M in 2012. I believe they are at inflection point and can absorb up to 20% market share or 1 Billion in Gross Revenue quickly. EFX is key Partner

Adventtax.com was founded by HR Block x CEO Mark Ernst who is now COO of FISV. He still owns 13.5% of AFS in family trust. Between two jobs he was #2 at IRS. Western Union and key Partner.

CorvisaCloud I do not have clarity on this accept to say Twilio is key Partner

NOVC controls a DTA like Kyle Bass MTG mostly hidden by GAAP. This will shield Taxable Income for yrs. See NOVC twitter handle @GrowGreatIdeas which implies a harvest so do not be surprised to see NOVC sell a piece of Streetlinks.com to FISV or EFX say minority interest say 25% for 300M immediately placing an enterprise value in access of one billion. WU could buy a piece of Adventtax and this 50 cts stock has 7-10 of cash on hand. All in my opinion. Mass Mutual, Babson Capital, Jefferies, are common shareholders that support NOVC. The only debt was restructured by owners Fortress, FBR, RAS down to nominal rate of 1%. What do these investors know Mr. Market does not?

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