It’s no secret that insider transactions can help predict individual stock returns. Insiders are some of the most informed participants in the market, therefore, their trades can provide powerful insights.
Insider transaction data can also be used to predict shifts in the broader market, however. Studies have shown that insiders tend to increase their stock purchases prior to stock market gains while decreasing their stock purchases following stock market gains. In other words, insiders are pretty good at timing the market.
So, what does recent insider activity signal about the stock market right now? Let’s take a look at the aggregate insider buying and selling activity for H1 2023.
Insider Transactions and Future Stock Market Returns
Before we look at the latest data, it’s worth touching on the research in this area of insider trading.
One of the earliest studies in this space was carried out by Nejat Seyhun in 1988. Seyhun analyzed 60,000 open-market purchases and sales by insiders from January 1975 to October 1981 with the goal of determining whether publicly-available information about aggregate insider trading activity can help predict future stock market returns. Seyhun found that the net aggregate insider activity in a given month was significantly positively correlated with the return to the market portfolio during the subsequent two months.
Seyhun followed up his work with another study in 1992. Here, he examined whether the ability of aggregate insider trading to predict future stock returns can be attributed to changes in business conditions or movements away from fundamentals. Seyhun concluded that both explanations contribute to the predictive ability of aggregate insider trading. It’s worth noting that in this study, Seyhun found that for the period from 1975 to 1989, the aggregate net number of open market purchases and sales by corporate insiders in their own firms predicted up to 60% of the variation in one-year-ahead aggregate stock returns.
More recently, in 2020, Dennis Malliouris, Alphons Vermorken, and Maximilian Vermorken examined the relationship between aggregate insider trading and future stock market returns in a paper entitled ‘Aggregate insider trading and future market returns in the United States, Europe, and Asia’. Here, the researchers concluded that aggregate insider trading can coherently predict future market returns of US, Asia-combined, Chinese, Hong Kong, and Indian indices. The researchers noted that insiders in these countries appear to trade on economy-wide expectations.
The takeaways from this research are quite clear – aggregate insider transaction activity can provide clues in relation to where the stock market is heading.
Insider Transaction Data for H1 2023
As for the aggregate insider transaction data for H1, the data is presented below.
Looking at this data, it’s the lack of insider buying in the first half of 2023 that immediately stands out. For H1 2023, aggregate insider purchases totaled just $11.2 billion. That was well down on H1 2022 ($18.5 billion) and H1 2021 ($25.3 billion).
Why has insider buying dropped off so dramatically? There are a couple of possible explanations.
Insiders could be concerned about revenue and earnings trends. This would support findings from FactSet, which recently advised that the estimated year-on-year earnings decline for the S&P 500 in Q2 2023 is -7.1%. If -7.1% is the actual decline, it would mark the largest earnings drop for the index since Q2 2020 (-31.6%).
Alternatively, insiders could be concerned that stock prices are too high at present. Research has shown that insiders tend to be value investors. And right now, markets do not look particularly cheap. For example, the median trailing-12-month price-to-earnings (P/E) ratio across the S&P 500 index is currently about 22.1, which is quite high.
Whatever the explanation, the lack of insider buying suggests that company officers and directors, in general, are not very bullish on stocks right now. Given that insiders tend to be good at timing the market, this could potentially indicate that the recent market rally is about to run out of steam.