FA Alpha Daily

Insider Trading Reveals Recent Trends May Not Be Short-Lived

Institutional investors have a secret website they follow religiously to gain valuable information that can change how they view the market. Despite its outdated appearance, secform4.com compiles public company filings in an easy-to-digest format, including Form 4 which reports insider trading activity. Analyzing insider trading activity provides transparency and insight into management’s thinking, helping investors understand their intentions and gain confidence in the company’s direction. In today’s FA Alpha Daily, let’s discuss secform4.com and look at why it is a powerful tool for understanding companies and their management.

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Secform4.com does not stop at compiling these filings. It also analyzes the results.

The conclusions of the analysis are not surprising most of the time. As a whole, management teams tend to buy stock when it is cheap and sell stock when it is expensive.

The following chart shows the ratio of daily buy and sell filings from public Form 4 data. A higher ratio means management teams are buying more (and are generally more bullish), and a lower ratio means they are selling more (and are more bearish).

In early 2020, the S&P 500 sank and insider buying skyrocketed. Management teams knew their stocks were cheap and saw it as a buying opportunity.

For the most part, the two lines tend to move in different directions. But every once in a while, something changes. Stocks start dropping, but management isn’t buying anymore. Or stocks keep rocketing higher, and management is still buying aggressively.

When management buys even though stocks are soaring, it is the sound of a slot machine jackpot going off. The getting is so good that these folks want more stock, no matter the price.

When management is not interested in buying shares on the cheap, it is a flashing warning sign. It signals that management teams across all industries are not comfortable with the macro outlook.

Even though the market is dropping, they would prefer to wait and see. They do not want to risk lighting more of their money on fire.

That is exactly what we saw in mid-March. The ratio fell to near its lowest level in the past five years and it got there in a hurry.

However, right after the fall, things changed quickly.

Silvergate Capital (SI), Silicon Valley Bank, and Signature Bank (SBNY) collapsed, taking the market with it. The five- and 22-day moving averages rose quickly as management teams took advantage of the market panic, buying up shares as fast as they could.

The ratio jumped from the bottom to slightly above-average levels in only a week.

Don’t confuse this with your usual market conditions.

Management teams saw an opportunity and they took it.

However, this does not change the overall trend. As the market leaves the bank crisis behind, insider trading is going back to where it was. The moving averages are falling almost as fast as they rose.

We still think the rally to start the year is a “FOMO” rally, not a real one. And management teams seem to confirm this, since they’re not eager to buy today.

Management teams see the mounting headwinds. That means the volatility we have seen in March and April may be only the start.

Expect more of the same for the next few months.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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