Is the stock market undervalued or overvalued? Investors and strategists have split into two camps and rarely have the lines between the two sets of interpretations been so emotionally defended.
To help assess the strength of the bearish and bullish arguments, it pays to look at selling and buying activity by directors and senior management. In theory, these corporate insiders, who are required to report to regulators any transactions they make in their own companies, should be well-positioned to provide early warning signs about the direction of the market.
In the United States, insider selling has recently increased, suggesting that insiders view the market as frothy. In Canada, though, there appears to be a healthy equilibrium of buyers and sellers, indicating a more optimistic outlook about stocks in this country.
Jonathan Moreland, director of research at InsiderInsights.com in New York, says while there has been a rise in insider selling in the United States in the four weeks to Oct. 7, it is not yet at levels that have previously signalled a major market selloff is imminent.
He believes the increase in insider selling should be a signal to long-term investors to be cautious about U.S. stocks, which have been propelled higher by expectations of further fiscal stimulus. "This rally is built on expectations that monetary and fiscal policy will stay too loose for too long," he says. "We have a very short-term looking market."
Selling has been particularly strong in financials, energy and technology. During 10 days in September, Larry Ellison, chief executive officer of software giant Oracle Corp., sold 8 million shares worth $217-million (U.S.).
But investors shouldn't fear the worst just because insiders are selling, says George Athanassakos, professor of finance at the Richard Ivey School of Business at the University of Western Ontario. An insider may dispose of stock for several reasons, ranging from pessimism about the company to the need to raise cash to buy a house or send a child to college. Buying activity provides a stronger signal about the market's direction, because insiders normally buy only if they see good times ahead for their company.
Canada: More Positive
In Canada, selling has been less intense than in the U.S., thanks in part to the domestic market's strong weighting in resource stocks.
"The insider story in Canada is fairly neutral. There's nothing negative," says Ted Dixon, Globe Investor contributor and CEO of INK Research, which tracks and analyzes insider trading data from the Canadian markets. "The insiders loaded up during all the doom and gloom of the summer."
For a while during the bleak days of July and August, there were more insider buyers than sellers, especially in the materials sector. While stocks have risen across the board since then, Mr. Dixon says it's important to note that insiders have not been selling and taking their profits. "There has been a pickup in selling, but we're not at a point where we're seeing insiders getting out. We're in normal profit-taking mode."
Bloomberg data on the number of insiders buying and selling in specific Canadian sectors show there were more than five times as many sellers as buyers in the energy industry during the last three months.
Pacific Rubiales Energy led in insider sales with eight, carrying a market value of $36.6-million (Canadian). On the buy side, purchases were not only significantly fewer but also smaller in value. A single purchase at Nexen Inc. topped the buyer's list at $53,885.
Canada's financial stocks, meanwhile, show an equilibrium between insider buyers and sellers not seen in any other sector. There were 52 sellers and 50 buyers over the last three months.
Among buyers, five insiders at GMP Capital Inc. purchased stock worth $9.4-million, the largest dollar amount on the list. On the sell side, 12 insiders at Canadian Western Bank sold $1.5-million worth of stock.