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What Corporate Insiders Are Telling Us
by Alexander Green, Chief Investment Strategist
Monday, September 28, 2009: Issue #1103
Last week, Vickers Weekly Insider Report noted that corporate insiders are dumping shares like there’s no tomorrow.
Insiders sold 6.31 shares for every share they bought. Contrast that with the seemingly brilliant move insiders made at the market low in March, buying three shares for every share they sold.
Some analysts are saying there is only one interpretation to this recent turn in insider activity: The market is due for a spill.
But not so fast…
Do Corporate Insiders Really Have All the Answers?
Let’s start with an obvious fact: To a great extent, the future is always cloudy. Corporate insiders don’t know what the market is going to do any more than you or me.
For example, Vickers was already ringing the alarm back in July, noting that insider selling to buying was 4.16-to-1, the highest ratio since the market’s all-time high in October 2007.
Jonathan Moreland, editor of Insider Insights, concluded at the time that insider behavior “seems totally inconsistent with this rally continuing unabated.”
Yet that’s exactly what’s happened in the two months since.
It’s important to understand that there is no piece of data – or combination of data – that will tell you in advance what the market is going to do. You might as well put on your lab coat and start trying to turn iron into gold.
Why Form 4 is Important When Watching Corporate Insider Activity
History shows that corporate insiders have excellent predictive powers, but not about the market. Sometimes they turn bullish long before the market bottoms. Sometimes they sell heavily way before the market tops.
What is important, however, is what companies they’re buying. (You’ll notice they’re not plunking for index funds.)
The unfair advantage that insiders have is a lot of material, non-public information about their own companies. That’s why they’re required to file a Form 4 with the SEC within two days of any purchase or sale of their own company’s shares.
What do corporate insiders know that you don’t? Plenty…
Corporate Insiders Profit From Vital Information… And You Can, Too
Corporate insiders have access to crucial information that other investors don’t. For example…
- Top executives and board members generally know the direction of sales since the last quarterly report.
- They know whether the company has gained or lost any key customers or employees.
- They know of any new products or services that are about to be announced.
- They know of any unexpected expenses, legal problems, or whether there is about to be a product recall.
- They know whether the company is ripe to receive an unsolicited takeover bid.
It pays to keep a close eye on what insiders are doing. Not so you can know what the market will do, but because you can discover which stocks are most undervalued (and therefore likely to outperform the market).
It’s tough to get a better buy signal than when you see top executives buying significant amounts of their own company’s stock with their own money at current market prices.
Just remember: The important factor is not the aggregate ratio of insider sellers to buyers in the market. It’s how heavy and widespread the insider buying is at those companies that are experiencing it.
History shows that those stocks are likely to be superior investments, no matter what the market has in store.
Good investing,
Alex Green
Editor’s Note: Given that insiders know more about the behind-the-scenes workings of their companies than the general public, following their buying and selling activity is one of the best indicators you can follow to gauge the health of companies and how their shares will perform.
That’s why Alex Green has devoted his Insider Alert to tracking heavy insider trends. And it’s generated outstanding returns lately, including 82% on Las Vegas Sands (NYSE: LVS), 57% on Huntington Bancshares (Nasdaq: HBAN) in three weeks, plus 105% on Inspire Pharmaceutical (Nasdaq: ISPH) options in just six days and 680% on Seagate (NYSE: STX) calls. For more information on how you can profit from insider trends, click here.
- Insider Selling: How to Profit From The Insiders’ Unfair Advantage
- CEOs: Put Your Money Where Your Mouth Is
- Tracking Insider Trading: How to Pick a Winner in a Down Market
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Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.
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September 28th, 2009 at 11:44 am
Given the fact that insiders must hold their shares for six months after purchase, and given the fact that is approximately six months from the March lows in the markets, wouldn’t one expect to see a surge in profit taking (insiders selling shares after the market rebound) at this point in time?
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September 28th, 2009 at 7:11 pm
The article did not give me a link to go to a website that will tell me what insiders are buying and selling.
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