Trader’s Narrative

Insider activity is a reliable metric which I haven’t discussed in a while. It is a bit quirky because by nature, insiders are net sellers. They get allocated shares as a pay package or through option incentives and they usually turn around and sell.

It is also natural for them to sell in a rising market. So in a bull market, seeing a rise in insider selling isn’t necessarily a harbinger of doom. In contrast though, insiders can tell us a lot more during market declines - like the one we’ve been having lately.

If insiders continue to sell or increase the pace as the market falls, this is a very negative tell for the market. In effect, the insiders are saying that things are probably going to get worse (so they want out now).

But if insiders start to buy during a down turn that has strong bullish interpretations. Although, when I say buy, what I mean in effect is sell less than the usual.

By comparing the buys and sells, we can track the relative sentiment of insiders. Last summer, just as the market was about to make a bottom, the ratio of insider sells to buys fell to 2. That is a very low number and it basically means that on average for every 2 shares sold, one is bought.

Remarkably, just as the market was peering into the abyss in mid August, according to Vickers Weekly Insider Report, the sell to buy ratio fell to an incredible 0.92!! This meant that there were actually slightly more shares bought than sold.

Since insiders are by nature net sellers, this is a very rare occurrence. The implications it has for the market are unmistakeably bullish.

Consider this other tidbit: the last time the ratio fell to less than 1 was in late 2002, marking with uncanny precision the end of the bear market.

I find it remarkable to see the market just below all time highs with such positive insider sentiment. The bull market doesn’t seem to care that it is long in the tooth, doesn’t seem to care about the sub-prime mess, or any other “logical” reason why it should not go higher and higher.