Insider Behavior Is Changing

09/15/2011 1:19 pm EST

Focus: MARKETS

Mark Hulbert

Senior Columnist, MarketWatch

Market trends are moving and changing faster, and insider share buybacks and the like are no exception, says Mark Hulbert of the Hulbert Financial Digest, who explains how these trades can often lead the market in this exclusive interview with MoneyShow.com.

What are the insiders doing? Let’s ask Mark Hulbert. Hi Mark.

Well, the insiders are following the rest of us in shifting their moods rather quickly.

It used to be that when insiders were bullish on the shares of their companies, they tended to remain that way for a number of months, and if they were acting bearishly, they would do so for a while. Now we’re seeing shifts—very, very quick shifts.

For example, before the market tanked in late July and early August, the insider data that we see—and we track a couple of newsletters that focus on insider data—one that had an indicator that I wrote a column about in late July was from the Vickers Weekly Insider Report, it’s published by Argus Research in New York.

They were reporting…the most selling on the part of corporate insiders since they have started collecting data in 1974, so that was one thing. I said, wow, the insiders…if somebody followed their lead, you would have perhaps taken some money off the table and escaped some of that carnage that happened in late July and early August.

Soon after that huge drop—15%, 16%, or 17% depending on which benchmark you look at—those insiders returned to the buy side. That’s an indication of how quickly, that was only a two or three week period of changing, but the market was 15% or 16% lower and the insiders said, well ok, that’s enough of a discount to encourage me to go out there.

One has to remember these are insiders. They’re the officers, directors, or larger shareholders of a company. The presumably know more about their company’s prospects than the rest of us. They’re not always right—no one always is—but they presumably know more and paying attention to them can really help us out.

This is legal insider trading. CEOs, CFOs that have stock—that is, they can either buy or sell that.

That’s right, and the key thing is, this is buying or selling with their own money. So it’s one thing to…for example, a lot of people are criticizing companies for getting involved in repurchase programs or buying back their shares on the open market.

They say, well, that’s all well and good, it’s great you’re spending corporate money, but when they’re out there spending their own money in the open market, not buying it at a sweetheart price that some board gave them through a great option exercise, but this is buying in the open market, than that presumably tells you something about what they really think. The money sometimes does talk more than their words.

It is the legal kind, though the government heavily restricts when they can do it and what they have to report. They have to report more or less immediately to the government and to the SEC whenever they buy or sell in the open market, and that is what allows services like the Vickers service to gather data. Because almost on a daily basis you can see what the trends are.

I suppose that’s the overall generalization of where we are with insider trading, compared to let’s say 20 years ago, where you wouldn’t necessarily need to look at it on that short-term of a basis, but now I think looking at it on a short-term basis is probably worthwhile.

That transparency does give individual investors a little bit more comfort, right?

That’s right, and it also—in addition to looking at overall market trends—you can also use it as a basis for deciding which companies to buy. You presumably want to buy a company where the insiders themselves are putting their own assets on the line, and avoid companies where the insiders are selling.

Interesting, because just recently you see the headlines of say some of the big financials…and I’m thinking maybe Morgan Stanley (MS), where the CEO and the CFO both stepped up to the plate using their own money, so maybe that’s good news for the financial sector.

We can only hope.

Related Reading:

Related Articles on MARKETS