Follow the Corporate Insiders

One of my favorite indicators is based on the commitment of traders (COT) data, which I discussed in the article titled "Trade with the Experts."  In that article I stated that using the COT indicator "is almost like trading with inside information - legally."  If the COT indicator is good, then trading with the actual corporate insiders must be even better.

Elevated ratios of corporate insider selling to buying can provide early warnings of market tops.  According to Vickers weekly Insider Report, that ratio is currently more than twice its historical average.

Corporate Insiders are Extremely Bearish

I have been aware of this indicator for some time, but did not realize that it was at such an extreme level until reading a recent article on MarketWatch.com titled Insiders Betting on a Correction written by Mark Hulbert.  In the article, Hulbert explains how to interpret the recent indicator values:

"Consider a ratio of the number of shares that insiders have sold to the number that they have bought. According to the Vickers Weekly Insider Report, published by Argus Research, the average level for this ratio over the last four decades is between 2-to-1 and 2.5-to-1. Any level below this average is considered bullish, while higher levels are bearish.

According to the latest issue of Vickers Weekly Insider Report, for the week that ended last Friday this sell-to-buy ratio stood at 5.50-to-1. At the early-May bull market high, in contrast, the ratio stood at 5.71-to-1."

Given the plethora of economic warning signals that are currently flashing red, the extreme level of net-selling by corporate insiders is troubling, especially entering a critical earnings season.

Conclusion

This ratio of insider selling to buying is a measure of market sentiment.  Corporate insiders would be considered "smart money" as would the commercials in the COT report - at least at the extremes.  The rule with market sentiment indicators is to always trade with the smart money and against the uninformed masses.  In this case, the smart money is running for the exits

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About Brian Johnson

I have been an investment professional for over 30 years. I worked as a fixed income portfolio manager, personally managing over $13 billion in assets for institutional clients. I was also the President of a financial consulting and software development firm, developing artificial intelligence based forecasting and risk management systems for institutional investment managers. I am now a full-time proprietary trader in options, futures, stocks, and ETFs using both algorithmic and discretionary trading strategies. In addition to my professional investment experience, I designed and taught courses in financial derivatives for both MBA and undergraduate business programs on a part-time basis for a number of years.
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