Insider Activity - Turned Bullish
The Smart Money says "BUY"
No trading signal is 100% in predicting market action.The Thomson Reuters Insider Sell/Buy Ratio, though, is about as good as it gets for gauging short-term (defined as weeks to months) future direction.
Over the most recent year this indicator sent out nine clearly bullish readings. Eight of them preceded very positive market results. Even the one false positive didn't stay wrong for long. Six weeks later the market was higher than when it went bullish in mid-July of 2014.
Don’t simply trust me on this. See the chart below for confirmation. The correlation is indisputable when you see the movement of the S&P 500 right along with the insider trading data.
Periods with intense insider selling correctly called near-term declines more often than not, but they were less reliable than the ratio’s bullish signals.
Company insiders always sell more shares than they buy. That is because they get lots of stock via employee stock options and bonus shares which vest over time.
Thompson Reuters sees anything less than 12 shares sold per each open market share purchased as the trigger for bullishness. Cumulative sales of 20 shares for every new purchase is called excessive and is perceived as bearish.
Note that this is a true signal rather than a contrary one.
Examples of contrary signals include a high VIX (volatility index), above normal readings on the equity-only put to call ratio, high bearish percentages on AAII (American Association of Individual Investors) sentiment surveys and heavy equity mutual fund redemptions.
Those are all things that take place when ‘Mom and Pop’ investors get nervous. They are almost always seen only after big sell-offs have already taken place.
Management typically takes the opposite side of panicky trades, selling into strength and buying when their shares are cheap. You’d be well advised to follow the smart money, rather than the amateurs.
