Bullish On The Inside

MarketWatch, from Dow Jones ^ | August 31, 2007 | Mark Hulbert

[SaxxonWoods]

ANNANDALE, Va. (MarketWatch) -- The insiders have spoken. And their message is quite bullish for the stock market's intermediate-term future. Corporate insiders, of course, are a firm's officers, directors and largest shareholders. It stands to reason that they know more about their companies' prospects than the rest of us, so it behooves us to pay close attention to whether they are more inclined to buy or to sell. That's relatively easy to do, since insiders are required to report to the government whenever they buy or sell shares of their companies' stock. Interpreting insiders' behavior can be a bit tricky, however. That's because insiders typically sell more of their companies' stock than they buy. This has been especially so in recent years, as the percentage has grown dramatically of insiders' compensation that comes from outright grants of shares as well as options. So the mere fact of more shares being sold by insiders than purchased is not, in and of itself, unusual or bearish. Also entirely normal and not particularly a cause for concern, according to University of Michigan finance professor Nejat Seyhun, is for insiders to pick up the pace of their selling as the market rises. This simply represents insiders taking advantage of the higher prices to cash in some of the shares and options that they hold. What would be a cause for concern? One of the most bearish things that insiders can do, according to Seyhun, is to maintain their pace of selling, or even accelerate that pace, in the face of declining prices.

[SaxxonWoods]

Interesting take, and he's right that insider buying that's heavier than selling is usually quite bullish for the market. The one caveat I would add is that insiders often have a longer time vision than the typical investor.