The history of the insider buy-to-sell ratio offers a pattern of corporate executives calling a bottom on market downturns. Don’t believe it? Let’s turn to GuruFocus.
The chart below provides a monthly breakdown of when the number of buyers outpaced the number of sellers (the ratio). When the number of buyers outpaces the number of sellers, the ratio is above 1. When the number of sellers outpaces the number of buyers, the ratio is under 1. At the height of the 2008 financial crisis, insiders called a bottom on their stocks over 10/2008 through 3/2009.
When the Federal Reserve stepped in with Operation Twist, markets started their turnaround on March 6, 2009. This was also when Congress executed a significant stimulus package under the Obama Administration. but it doesn’t stop there.
What the Insider Buy-To-Sell Ratio Shows
A surging insider buy-to-sell ratio accompanied short-term bottoms over the last decade. Insiders ramped up buying during the debt ceiling jitters and Black Monday of 2011. Buyers also stepped in in late 2015 after China sent panic across the markets. This was alongside falling oil prices and Greek debt woes.
The same transpired after a significant selloff in late 2018. All due to the “Chinese tariff” tantrum, expected interest rate hikes, regulatory speculation in the tech sector, and other factors.
The most significant buying since the Great Financial Crisis transpired in March 2020. COVID-19 fears shut down the U.S. economy and the S&P 500 shed roughly 34% in a matter of weeks.
Insider buying ramped up over two weeks as the Federal Reserve announced an unprecedented amount of monetary stimulus. Once again, the insider buying signaled a bottom in the market. This is a reminder that no one knows the balance sheets and the value of corporate assets better than insiders. I’m talking CEOs, CFOs, board members, and other executives who scoop up their own shares on the cheap. Of course, it also helps when the Fed plays ball.
History Repeats Itself?
Executives might sell their stock for any number of reasons. A CEO might sell a few million dollars in stock because they think the stock is heading lower. Or they may need to buy a new vacation property or send a child to school. Of course, one sale doesn’t provide many clues about sentiment. But a large amount of selling by multiple executives – a process known as cluster selling – could indicate that corporate insiders think the stock is overvalued compared to where it might be in a few months.
In mid-2021, interest rates remained at zero – alongside low expectations that the Fed would raise interest rates by March 2022. However, as sentiment slowly increased for rate hikes slowly, we saw significant insider selling. In the first 11 months of December, CEOs and insiders sold $69 billion in stock, according to InsiderScore/Verity. That figure was 79% above a 10-year average. Which is a relatively clear signal that executives were happy to take money off the table.
Since November, the selloff across the markets fueled the usual speculation on when a bottom would form. In the case of locating a bottom, the most apparent predictor would be the amount of buying and selling in the market.
Following a dismal selloff during January expiration week, many traders kept a close eye on whether we would see a large round of insider buying. Sure enough, a pattern of solid buying revealed itself during the final week of the month.
Another Insider Buy-To-Sell Ratio Chart
The chart below – from SecForm4.com, which tracks insider buying and selling – shows the five-day moving average of insider buying to selling in dollar amounts during the period. The blue line reveals that – following that dramatic January selloff, the 5-day moving average of insider buy-to-sell ratio in terms of dollar amount hit its highest level since March 2020.
The January wave of insider buying signaled a bottom alongside various other metrics like aggregate momentum of oversold ETFs.
This might not predict a complete bottom of the market – as evidenced during the 2008 crisis and multiple months of strong buying. However, that buying pattern did provide some stabilization. At least before the surprise pronouncements of James Bullard in mid-February and around Russia-Ukraine tensions.
Should those tensions and Fed jitters push the market lower, continue to monitor the 5-day moving average of this metric in times of high volatility. The common question we always hear when the market sells off: Are we at the bottom yet? The insiders will tell you if you listen.