Insiders Are Buying: Get Ready for More Weakness

This group action is evident on the chart below. You can see that peaks in the rolling four-week average of my ratios have tended to correspond with market bottoms, and significant bottoms have tended to be indicated by peaks of at least 40%.

Insider Ratios Rolling four-week average

Click here for larger image.

We are very far from that absolute level right now. Last week's positive ratio was 21.7%, meaning that 21.7% more firms had insiders buying their shares in the open market vs. selling them. Illustrating what a stark departure that positive ratio was, it brought the rolling four-week average of the ratios up to only negative 25%.

So if insider activity is to reach the sort of level that has historically corresponded with real market bottoms, it will take many weeks of positive ratios to thrust it up there. In the meantime, the indices would be swooning.

Nasty, Mean Reversion

To be sure, one positive weekly buy/sell ratio doesn't preordain a continuing upward trend in my ratios and a falling market. But consider this: I relayed above that last week's positive ratio was only the 12th in over six years. What I held back was that there was not one single positive weekly ratio between August 2002 and August 2007. So after a six-year drought, we have had 12 positive ratios generated since August 2007-- and look at what the market has done!

My bias remains bearish now, and I believe this trend of positive weekly buy/sell ratios and a weak market will continue. My big surprise is that it has not happened sooner.

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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.