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Insider Trades Show Strong Bullish Signs in Financials

As the market quickly lost about 15% from its April peak, market valuation is closer to more reasonable levels. As indicated in our page of where we are with market valuations, the market is now about fair valued. From this point now, we can expect an annual return gain of more than 6%. 6% may not sound exciting at all, but it is much better than 3% a year, where we were just a few weeks ago.

We now see a very bullish sign in insider trades. Insiders are much more bullish than they were a month ago. This brings up the ratio of number of insider buys to insider sells to the level we only see during the market bottom from October 2008 to March 2009. This is especially true for sectors such as financials and healthcare.

Below is the monthly ratio of number of insider buys over insider sells. Currently the ratio sits at 1.25. It is higher than any time since Jan. 2005 other than from Oct. 2008 to March 2009. Therefore insiders are as bullish as they were from Oct. 2008 to March 2009, and they turned out to be right.

General Market: Ratio of Insider Buys Over Insider Sells


As pointed by previous insider research and our own study, 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. We want to point out that in the market crash from 2008 to 2009, it took 5 months for market to bottom after we observe elevated level of insider buys, although most of the insider buys during the period were hugely profitable.

The latest jump in the ratio of insider buys to insider sells is not even across different industries. We observed much higher jump with the ratio in healthcare, financials compared with industries like consumer goods, industrials, and oil.

Below is the ratio for consumer goods companies. The stock prices in this sector are mostly higher than they were at the market peak of 2007. The correction is also relatively small this time. We do not observe jump with the insider buy/sell ratio with consumer goods companies.

Consumer Goods: Ratio of Insider Buys Over Insider Sells


However, the ratio of insider buys over insider sells had a huge jump for both healthcare and financials. The ratio for financials is even higher than it was at the market bottom of March 2009.

Healthcare: Ratio of Insider Buys Over Insider Sells

1874919744.jpgFinancials: Ratio of Insider Buys Over Insider Sells


Many of the insider buys in financial sector are from regional banks and financial companies. In many cases the multiple insiders bought the stock lately. Therefore those purchases made into the list of Insider Cluster Buys, which is a screen that tracks the multiple purchases by several executives of the company. One big financial that made into the list is Morgan Stanley (NYSE:MS). Over the past two weeks five executives and directors bought a combined 185,000 shares of Morgan Stanley stock at prices above $20. Among them CEO James Gorman spent more than $2 million of his own money and bought 100,000 share of the stock.

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.9/5 (47 votes)


Jake Welsh
Jake Welsh - 6 years ago    Report SPAM
Does your screen separate incentive grants from "free market" buys?
Gurufocus premium member - 6 years ago
Yes, we only track the trades at market prices.
Rabbit - 6 years ago    Report SPAM
as of end of day Frdiay, Sept 23, without specific numbers, I believe it accurate to say the Dow, S&P 500, Nasdaq, and most all long financial index / ETF's are lower today then when the article was written. Perhaps not unsimiliar to the Oct 08 - March 09 time frame.

GuruFocus, Any chance you might follow this metric month by month for a while? Or does the website give us the tools to reconstruct on our own?

Thanks for the article. Rabbit

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