International Investing

Watching insider buys and sells can give a trader a lot more information about managers’ opinion of the stock than the press releases. Who knows more about that stock than the insiders? No one. Changes in the pattern of insider buying or selling is worth noting. Best of all, the information is free online through SEC filings.

Traders get more than just seeing when insiders buy and sell. Counter intuitively, “…share prices often outperform the market if company insiders — executives, directors or large shareholders — buy the stock before warnings of lower-than-expected earnings or revenue.” The idea is that if even the insiders are surprised by bad news then its just a temporary blip and not the start of a trend.

Here is how it might look in real life.

On July 27^th of this year Dow Chemical cut its guidance cutting its stock to plummet nearly 10% on the day to $33. Less than six months later it is back to $40, a 20% gain. If you take a look at the chart this was a perfect opportunity to ride on the tails of the insiders. If the insiders were confident enough about the firm to buy after that large drop it shows a lot of confidence in the stock. The weeks following heaving insider buying the stock rose rapidly.

More importantly what does the overall picture of insider trading tell us about the state of the stock market? An article by marketwatch.com this week gives some insight:

Muzea makes market calls based on the activity of corporate insiders. He’s considered the grandfather of the insider-tracking industry, generally keeping a low profile to all but his high-paying hedge fund clients.

… according to Muzea, this is likely the beginning of a sharp and steep decline not unlike the one that hit the market last spring — and maybe worse.

… Muzea notes, however, that insiders have been finding less value in the market over the past eight years. “Every time you have a low,” he says, “you have fewer and fewer stocks with positive patterns.”

Before you go calling this a scare tactic on a down day, keep that Muzea has a record, and he is basing his forecast on a history of following the market as it relates to the actions of insiders. “If you want to lose money over a long period of time,” he says, “buy when insiders are selling and the public is bullish.”

Historically the current insider trading patterns we are seeing are bearing for the market.