There Is No Sure Way to Know When The Market Will Recover, But There Will Be Clues

The stock markets are down this year-to-date, but we all know things will change eventually. The question is when and how we will know it’s truly the time to act. 

Did you know that you can monitor insider actions to get a better sense of future market conditions? Analysts do it all the time because they know that company insiders have far more knowledge about the health of their own company than outside investors. While insider buying can be a strong indicator for you, the trick is knowing what information to look at and what results to expect.

Not All Trades are the Same

“Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” Peter Lynch, investor, mutual fund manager, and philanthropist

Even if we know that buying is more important than selling, it’s also important to look at the type of buying:

  • Stock options don’t count–Any employee exercising their stock options is buying at a much better price than outside investors can. And new hires may be required to purchase stock as a company policy.
  • Size matters — Small purchases may just be symbolic to show company loyalty and not be a sign the company is going places. And remember, size is relative; a $400,000 purchase by an exec who makes 100 times that a year is a “small” purchase.
  • There’s strength in numbers — One or two people buying their company’s stock at the same time may not mean much, but more than 3 might be a sign of important things on the horizon. 

What They Know and Who Knows It Really Matters

Not all inside investors have access to the same information or level of detail. In general a C-level executive will know more about where the company is really going than a director or manager at any given time and the Chief Compliance Officer or Chief Financial Officer in particular will be the important ones to watch. They have more access to the specific information that concerns trading and might significantly affect the company’s stock prices.

Patience is Always Your Friend

Remember that even if a company insider feels something is about to affect their company’s stock price, they will probably make their move well in advance of the event and therefore the  resulting price change. That’s one key way that they protect themselves from the appearance of insider trading that would be illegal. Think of it this way: if you’re following an insider’s lead, you have to not only act like them, but have to wait like them for the results. Some studies have shown that the time between insider activity and official company announcements can be as much as two years.

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