Insiders Are Buying: Get Ready for More Weakness

Last week, something happened that has occurred only 12 times in the past six years: My weekly insider buy/sell ratio was positive.

So insiders are buying heavily (and selling less) into this selloff. That means we are obviously close to a bottom, right?

Absolutely not! In fact, any continued trend to higher weekly insider buy/sell ratios will likely correspond with more market weakness, not strength.

More insider buying is bearish? This seems counterintuitive, but it makes perfect sense if you think about it.

The fact is, insiders don't move the market. The market moves insiders. The lower any particular stock goes, the more likely it is that insiders will find it an attractive buy. The higher it goes, the more likely it is that insiders will find its valuation less compelling. My ratios just measure this value call en masse and relate it to the indices. And with pretty darned good success, I might add -- especially prior to 2003 (more on that further on).

Sure, insiders as a group could start selling their falling shares if they started to believe that the financial implosion was going to blow the whole market back to medieval times. They could also buy into any strength their stocks show (a whimsical concept at this moment) if they believed the bailout plan would be an amazing cure for what ails the global economy.

On an individual stock basis, insiders buying into strength is absolutely bullish, and selling into weakness is absolutely bearish, and those combinations of insider activity and stock price do occur.

But those insider signals are bullish and bearish because of how relatively rare they are. In general, insiders do just the opposite. Very sensibly, they tend to buy into weakness and sell into strength.

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Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback; click here to send him an email.