What do corporate insiders think about the stock market?

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Corporate insiders are behaving in ways that suggest the stock market’s outlook is neutral.

This is good news, since not that long ago they were aggressively selling their companies’ shares. That was the case at the beginning of last May, for example, as I reported at the time; over the subsequent five months the S&P 500 lost 14%.

The not-so-good news in the latest data is that insiders aren’t aggressively buying, either. That’s what many of them were doing last September and October, as I also reported at the time. The S&P 500 is 15% higher today.

The current mixed message from insiders is reflected in data compiled by Nejat Seyhun, a finance professor at the University of Michigan. He focuses on just those insider transactions undertaken by corporate officers and directors. He ignores those undertaken by the third legally-defined category of insiders—a company’s largest shareholders—since his research has found that following them confers no market-beating advantage. He updates the data in close to real time at a paid subscription website, InsiderSentiment.com. (I receive no compensation from this site.)

Seyhun calculates an insider sentiment index that represents the percentage of publicly traded companies that experience net insider-buying from corporate officers and directors. For February to date, this index stands at 15.3%, which is significantly below its 10-year average of 26.3%. The accompanying chart plots the three-month moving average of this index, which smooths out much of the month-to-month volatility. You’ll notice that this moving average has also declined significantly in recent months.

The low percentage of net insider buying would seemingly be sending an unambiguously bearish message, but that is not an accurate interpretation, Seyhun said in an email. That’s because it makes a big difference how the market is performing as the insiders are selling. It would be particularly bearish if insiders sell into a market decline, for example, since that would mean the insiders have little confidence that their shares will recover any time soon.

In contrast, selling into a rally is often more benign, since it could mean nothing more than insiders opportunistically taking advantage of high prices to cash in some of the shares they received as part of their compensation. This selling-that-is-not-bearish has become especially prevalent in recent decades, as an increasing share of compensation paid to corporate officers and directors is coming from equity grants rather than cash.

To confirm whether recent insider selling is of this more benign variety, Seyhun segregated recent insider transactions into two groups: Those occurring in stocks that have lost ground in recent weeks, and those that have risen. Insiders are net sellers in the former group but are buying stocks in the latter group at a slightly-above-average pace.

The bottom line, according to Seyhun? While the signal insiders are sending is not “a great positive signal, … at least it is NOT ominous.”

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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