Many investors have been shaken by the stock markets volatility over the past two months. But the steep slide and subsequent market swings have stirred a key constituency of buyers: company insiders.
Since the beginning of August, executives have snapped up shares of their own companies on the cheap, and in record numbers. Many market watchers say thats a good sign for the market going forward.
I think the fact that insiders stepped in with such strong enthusiasm is a very bullish sign, says David Coleman, editor of Vickers Weekly Insider, which has tracked insider transactions since 1974.
Coleman says last month that their index hit the highest level of buying since 1998: That lasted for a period of weeks and were still well within bullish territory.
Skeptics point out the pace of buying has dropped sharply from those extremes, but Coleman says executives are still buying when others are selling. I would definitely expect to see insiders continuing to buy dips as they have the past several weeks. I dont see any indication of that slowing.
During the past weeks downdraft, Coleman notes, there were significantly more purchases than sales on down days. Colemans analysis of Securities and Exchange Commission filings shows two executives filed to buy their own companys stock for every one sale during Fridays stock market selloff.
That is a trend thats been apparent during the very volatile period of stock trading that began in late July.
Scott Gambills proprietary Gambill Oscillator surged to never-before-seen levels on August 10, two days after the recent lows for the Russell 3,000, the universe of companies that he tracks.
There were four buyers for every one seller, Gambill explains. He says the indexs 418% reading was extreme, since a normal reading is about 25%.
Gambills ratio tracks the amount of buying and selling by corporate officers and is available to clients of Hays Advisory. The ratio has only been around for nine years, since implementation of the Sarbanes-Oxley corporate compliance regulations made it possible for Gambill to track these insider transactions in what he calls almost real time.
In its short history, the ratio has captured wholesale buying by insiders at market turning points, most notably in November 2008 and March 2009. Those were the last times insider buying was even close to the recent spike.
Money managers including Brian Flanagan closely follow these jumps in buying by company executives.
We use it for attractive entry points, explains Flanagan, who oversees $1.5 billion for Thrivent Asset Management. We do it more on an individual stock basis, but on extremes its very valuable in looking at the market as a whole.
When the markets selling off we look at sentiment, cash positions, oversold conditions, and panic selling. And then when insiders buy, thats a low-risk entry point.
Flanagan says that is helpful given the recent whipsaw market moves. Clearly theres a lot of volatility in the market. The whole political environment in the U.S. and Europe creates a variable we havent seen.
Some investors say these political factors coupled with concerns over slowing global growth and mounting debt trump the bullish buying spree by executives.
Its a positive sign, but for us the macro concerns at this point outweigh it, says James Shelton, who helps oversee $1.7 billion as chief investment officer for Kanaly Trust in Houston.
Shelton adds, We take some comfort in it, that insiders are highly confident, but the macro concerns are having more impact on what were doing today.
Shelton says his firm is playing defense as it awaits more data on whether the economy is contracting or not. Kanaly has cut exposure to emerging markets and small-caps and is stocking up on larger, dividend-paying shares. The money management company has also added more investment-grade corporate bonds to its holdings.
Shelton explains, If we avoid recession, stocks are pretty cheap. But if we go into recession, theyre not.
Analysts who follow these company insider purchases say these executives may not be able to make macroeconomic calls, but the insiders are betting their own businesses are being literally sold short.
(Company officials) may not know what the market will do, but they know their own individual stock is cheap, Gambill reasons. They dont need to buy their stock when its down.
Gambills strategy is pretty basic: follow the money. Over the past few weeks he notes property insurance companies such as Cincinnati Financial, Hanover Insurance Group, and HCC Insurance have had unusually heavy buying by corporate insiders.
Gambill says, Despite Hurricane Irene, they seem to be pretty fearless about hurricanes and claims. The last time I saw that kind of broad-based buying in a sector was May and June last year in the oilfield services sector after the BP spill.
The insider transaction analyst says, When you have a bunch of (corporate executives) saying the same thing at the same time, my conclusion is, their bet is the markets not going a lot lower so theyre putting their money where their mouth is. If theyre buying here, then we should too.