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

Can Aggregated Insider Trading Activities Predict the Market?

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gurufocus
Jul 08, 2010
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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.


  • CEO Buys, CFO Buys: Stocks that are bought by their CEO/CFOs.
  • Insider Cluster Buys: Stocks that multiple company officers and directors have bought.
  • Double Buys:: Companies that both Gurus and Insiders are buying
  • Triple Buys: Companies that both Gurus and Insiders are buying, and Company is buying back.

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