Insidey-Sense – The Average Joe

    Insidey-Sense

    Victor Lei — Head of Research

    July 30, 2020

    July 30, 2020

    Corporate insiders have a special sense that the average person doesn’t have, the insidey-sense, the power to see what others can’t.

    In March, inside executives bought a record amount of shares during the bottom of the stock market crash. Over the past couple of weeks, that quickly shifted to a record amount of selling. In July, for every 5 insiders that sold shares, only 1 bought.

    • Over 1,000 executives from companies like Costco ($COST), Workhorse Group ($WKHS) and Moderna ($MRNA) sold shares of their employing company.

    Insiders are rushing to cash out

    During the March stock market crash, insider buying hit a 9 year high. Corporate executives rushed to buy their own stocks at a discounted price. Turns out, it was the right decision. The stock market increased by over 45% in the following 3 months. At the beginning of this month, we saw a reverse in action as insiders sold their shares at a record pace.

    The greatest number of insider activity in the past week was seen in the biotech industry. Executives inside the companies developing a COVID vaccine have sold shares worth over $1b since March. Many of these insiders took advantage of positive drug development news that sent their stock prices to record highs.

    Taking a hint

    A high number of insider buying or selling can be a signal to investors that a company may be undervalued or overvalued. However, insiders buy or sell their stock for various reasons.

    According to legendary investor, Peter Lynch, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think their share price will rise”.

    The question on everyone’s mind… Is the market crashing?

    A large number of insider selling does not always lead to a market crash or pullback. There have been 5 instances in the past 5 years where the sell-to-buy ratio went above a 4 to 1 ratio. In 3 of these cases, the stock market fell over 10% within the following month. In the other 2 cases, the stock market continued rising.

    Insider activity can be used as a gauge to understand market sentiment. Investors should not make investment decisions based solely on insider buying or selling. Insider activity should be used alongside other metrics to make investment decisions 

    Corporate insider buying and selling data can be found here.

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