Insiders Not Trading

Fox Business has an article out about a lull in insiders buying stocks. I don't see any way to interpret this news as good. But it also might not be as bad as the article indicates for a couple of reasons.

First, here's the cause for concern, according to Fox Business:

Executives are buying fewer shares in their own companies, and by some measures are selling stock at rates not seen since the Dow traded around 14,000. This trend is raising caution flags with many observers.


"Historically, insiders have been a leading indicator of where the market's going to move and we're seeing a clear indication that insider sentiment is becoming more neutral if not approaching bearish levels," says David Coleman, editor of Vickers Weekly Insider Report, which tracks corporate transactions.

Just three months ago these executives scooped up shares of their own companies as the major stock indexes sank to the lowest levels in a decade. This buying preceded the low watermark for the indexes thus far this year, and the purchases provided fuel for the powerful rally that catapulted the S&P 500 up 40% from the March lows.

One possibility for less buying could be drawn from the last paragraph of the block quote. If insiders purchased large amounts of stocks at discount prices three months ago, they may have spent most of the cash they can they had to invest with.

Another thing to note is timing. As that same paragraph indicates, that buying occurred during a period when stocks were historically low. These insiders, who are probably pretty savvy about stock prices, must realize that stocks have rebounded since then. Today's prices don't look nearly as tempting. Unless they are 40% more optimistic than three months ago, they would not pay higher prices now. I doubt many executives that much more optimistic.

As for the increase in selling, that could just be profit taking. Executive bonus levels are down. Many executives probably rely on part of their bonuses for everyday expenses. If they have some stock that's worth more now than it was three months ago, selling some of that stock for much needed cash makes sense.

These three potential explanations are all more related to investor psychology than executives' confidence in their companies or the overall economy. Remember in this case, executives are also investors. So while the trend of insiders buying less, or even selling, their company stock is not comforting, it does not frighten me under the circumstances described.