Bearish signal? Insiders aren’t buying into market pullback

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The Toronto market is enjoying some healthy gains Monday afternoon, but the S&P/TSX composite index is still down nearly 3 per cent so far this June. And it's only the middle of the month.

Normally, as stocks drop, corporate insiders boost their buying activity, thinking that there are some deals to be had.

But, in a potential bearish signal, insider buying – stock purchases made by executives and directors within their own businesses – has not picked up much in most sectors.

INK Research's Toronto Stock Indicator is at 178 per cent – a healthy level but down from 212 per cent at the end of May. At 200 per cent, there are two stocks with key insider buying for every one stock with selling. The higher the number, the more prevalent the buying.

Insider buying has picked up in technology, the specialty mining group (a subgroup of basic materials) and real estate investment trusts – relatively small sectors of the Toronto market. But insider sentiment has been falling in the major sectors of energy, basic materials, consumer cyclicals and financials, INK notes. Insider activity is relatively steady in industrials.

"Generally, it appears that insiders bought in May, but are now reining in their spending as risks rise across global markets," INK CEO Ted Dixon said in a research note. "Although this is an early development, it requires watching, particular after the U.S Federal Reserve's policy statement on Wednesday with respect to asset purchases and interest rate policy."

Stateside, insiders are picking up their selling in U.S. banks. INK Research's U.S. bank stock indicator has been drifting toward 100 per cent, where the number of stocks with buying is even with those selling. Insiders had been particularly bullish on the sector this quarter, but their interest now appears to be waning even as stock values come off their highs.

"Usually, as share prices fall, insiders go bargain hunting. When the shoppers stay home, it usually means a fear of stormier weather ahead," comments Mr. Dixon. "In the case of stocks, a noticeable number of insiders in North America seem to be worried about a continued rise in the risk environment."