In January, for the first time in 13 years, corporate insiders bought more of their own shares than they sold.
According to the FT "in the past, periods of net buying by company executives and directors have been a signal that the market will rise sharply in the ensuing 12 months."
When corporate insides sell investors become concerned that they know something about a company’s future prospects. In a bull market, the sin of selling your own shares can be forgiven. Most executives say that they want to "diversify their portfolios." That seems like a good excuse. At least few investors care if a stock has doubled.
The buying of securities by executives may have absolutely nothing to do with a view that their prospects may improve. In a bear market, insider sales are the most clear benchmark available that a company has trouble. Insider sales tend to push share prices down even further. What management sells when a stock is going down? At least small purchases show shareholders that executives are not bailing out.
There is tremendous pressure on corporate officers to hold their shares now. Selling just looks so damn bad. Even if the next year or two look bleak, insiders do not want to signal a loss of faith.
It is not so much that the buying of shares shows the market is moving up. Insiders won’t sell and push their stocks even lower.
Douglas A. McIntyre
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