Insider Selling Is Very Telling, Supply Is In Control of This Market

By Karen Riccio — May 11, 2022

The greatest stock market crash in American history happened nearly 100 years ago in 1929.

Although that devastating crash can’t be blamed on a single cause, one fact remains undisputed.

Insider trading played a pivotal role in building up severely inflated stock prices, and it also served to spur the market’s steepest tumble ever.

Today, whether it’s legal or not, insider trading is still one of the most watched market phenomena - and with good reason.

Beginning in mid- to late 2021, insider selling began leading the market down - way down.

Below is a chart showing insider trading versus the stock market. It’s illustrated here in the Catalyst Insider Buying Fund (INSAX) (the blue line) versus the S&P 500 (the black line):

(Click on any image to enlarge.)

 

As you can see, in late 2021, insider buying took a dive. And as 2022 rolled around, insider buying continues to fall precipitously.

Here’s what you need to know.

Who Are These Guys?

Company insiders include senior officers and other members of management. That group also includes any individual or entity that beneficially owns more than 10% of a company’s voting shares.

But, that inner circle also encompasses anyone else who’s “in the know” about a company’s internal operations and (especially) about its financial condition.

And those folks could include administrative personnel or even the family and friends of a company’s personnel. As well, outside consultants who are intimately familiar with a company’s operations, such as members of counsel or accounting firms can also be insiders.

Next, we look at what constitutes inside information.

“Materially”

In short, inside information is any fact that could materially affect a company, positively or negatively, and thus the price of its stock. Things such as new contracts, licenses (like FDA approval for a novel drug), lawsuits or notable financial events such as huge, unexpected gains or losses in earnings.

The law also stipulates that material information is anything an investor would consider important for making his/her own investment decisions.

And of course, just knowing insider information isn’t a problem.  The trouble starts when an insider uses that material information to trade his/her company’s stock before disclosing it to the public.

Insiders have to be very careful about the timing of their insiders stock acquisitions or dispositions. There are a specific number of days before and after a company releases material information during which insiders cannot legally trade their own stock.

So as you can imagine, insiders have to plan well in advance before they buy, and especially before they sell their company’s stock. 

In fact, insider transactions can be such an onerous proposition that in 2000 the Securities and Exchange Commission (SEC) set forth a new ruling, 10b5-1, for insiders to preplan some of their sales.

While insiders don’t have to announce those 10b5-1 plans, they do have to publicly divulge any other transactions. 

You can view insiders’ stock acquisitions and dispositions by visiting the SEC’s website. Once you’re on the website, you can enter your favorite company or its stock ticker (the red arrow).

(By the way, our very own Karen Riccio recently outlined seven of the most important SEC filings that all investors should know.)

What To Watch Out For

The same way you want to invest where the real money is (the giant hedge funds) you also want to know what the insiders are doing.

You want to watch out for systematic insider selling. 

That’s especially important when top C-suite managers are disposing of large blocks of stock in a concentrated time frame.  

In November, I began saying that the market was going down. It’s no accident that about that time record insider selling began. 

In fact, on December 1, CNBC reported that insiders sold $69 billion of their stock over the preceding 11 months. That was nearly an 80% increase over the preceding 10-year average.

The Wall Street Journal also reported that, last year, 48 top shelf insiders had sold large blocks of their insider stock - nearly four times the average number of insiders from the previous four years (2016 - 2020).

Those sales included Google's co-founders, Larry Page and Sergey Brin,  Microsoft’s CEO, Satya Nadella, Amazon’s founder, Jeff Bezos, as well as billionaire Ronald Lauder of the famed Estee Lauder cosmetics fortune.

In January, Forbes reported that last year, Mark Zuckerberg, CEO and founder of Meta (aka Facebook) sold shares of the company “nearly every weekday for almost 11 months.”

Elon Musk’s massive sales of his Tesla (TSLA) stock is yet another example. Last year, he sold about $22 billion in his TSLA shares.

And on the days just prior to April 28, CNBC reported that Musk sold another batch of his TSLA shares - that time worth about $8.4 billion, and following his bid to privatize Twitter.

All said, insider selling is a big reason as to why we’re seeing reports like these:

Bloomberg recently reported that for over 21 consecutive weeks, more stocks hit 52-week lows than highs on the New York Stock Exchange and the Nasdaq Composite.

Or the US News and World Report from May 6 announcing that roughly 70% of the companies in the S&P 500 had fallen.

And perhaps more sobering, in the first 19 weeks of this year, the S&P 500 posted its worst start since 1932.

Let me be very clear. Huge waves of insider selling sends a stark message about this bear market.

And the very fact that through March this year, insiders had not returned to buy back into their own companies, sends yet another signal that Supply is firmly in control of this market.

If the market rallies, it’ll likely be your last chance to sell. 

Chris Rowe

Founder and CEO, True Market Insiders