Insider Trading Buy/Sell Ratios Tumble, Will the Markets Follow?

Mike Stein - Senior Research Associate

[Click here to read this article on EZ-Insider]

Much of the investment community's focus last month was on various "meme stocks" rocketing upwards (see Jan. 20 post). Simultaneously, major indices also continued their steady recovery from their tumble last March, rising to all-time highs (to far less fanfare).

While the market rose, the ratio of insider buying to insider selling fell to an all-time low in January. The ratio of companies with buying activity to ones with selling activity fell to just 0.22 (180 purchased to 828 sold). When looking at individual insiders the ratio fell even lower, tumbling to 0.19 (331 purchased to 1,720 sold). With both ratios at their lowest point in our dataset, will the markets soon tumble as well?

While no guarantee that the market will collapse, the ratios' low levels could suggest that insiders are becoming increasingly apprehensive about buying their employer's stocks at current valuations. The 180 companies with buying activity last month represents the lowest monthly count of companies with buying activity since at least 1988. The lack of insider buying could suggest that insiders are taking an increasingly dim view of their stock's growth potential.

The tumbling ratios could suggest an ominous signal regarding corporate insiders' outlook, but may not suggest that insiders think their stock will fall. Insiders could be waiting to see what changes the incoming administration might make, or could be sitting out of a market that seems increasingly volatile and irrational. Regardless of their reasoning, investors should take note of the broad insider apprehension, which stands in stark contrast with recent exuberance by both institutional and individual investors.

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The Washington Service Research Team