Corporate insiders, on average, make better calls on buying and selling shares than individual investors – not so surprising given their intimate familiarity with their companies and industries.
And right now, their actions in both Canada and the United States are suggesting the market may be poised for a significant upturn.
INK Research, which monitors buying and selling activity by officers and directors within their own companies, says its TSX sentiment indicator is now at 136.6 per cent, a gain from 120 per cent last week. Back in October, the indicator was a little below 100, the point at which there are an equal number of companies with key insider buying and key insider selling.
"Insiders appear to be looking beyond the current gloom," concluded INK Research CEO Ted Dixon.
The indicator is derived by taking the number of stocks with buy-only transactions over the last 60 days, and dividing that with the number of sell-only transactions. The indicator ignores stocks that have both buying and selling in an effort to give a more accurate reading.
Last Thursday, when the S&P/TSX index was stung with a 118-point loss and the 11,800 level came under attack, insiders were particularly active snapping up stock. There were 121 companies with insider buying versus 40 with selling. This 3-to-1 ratio is unusually high, Mr. Dixon notes.
Insiders in the energy sector seem especially bullish. INK's energy indicator is now at 283 per cent, up from 263 per cent last week, with the ratio of buyers to sellers the highest of any of the top 10 sectors of the TSX. "Energy sector investors appear to be anticipating good news when Ottawa decides on the foreign takeover applications of Nexen and Progress Energy," Mr. Dixon notes.
It's a somewhat similar story in the U.S. Mark Hulbert of MarketWatch points out that the ratio of all shares that insiders have recently sold in the open market to the number that they have purchased stood at 1.58 to 1 last week. That's less than half the average level over the last decade of 3.4 to 1. The insiders' sell-to-buy ratio got as high as 6.86 to 1 at the bull market's high earlier this fall, he notes.
"In other words, at least when measured according to this indicator, the insiders are more than four times more optimistic about their companies' shares now than two months ago. This much insider enthusiasm is a good sign," he said.
Why should investors care about these insiders given that – just like the rest of us – they can be often wrong with their investing decisions? Consider this: since the bull market that began in March 2009, there have been just three occasions prior to now in which the sell-to-buy ratio fell below 2 to 1 in the U.S. Each time, it came within a few weeks of a significant low in the market, according to Mr. Hulbert.