Corporate insiders are dumping stock at the fastest rate in more than a decade

By Mark Hulbert

Recession fears envelop leaders on the front lines of the economy

Only three S&P 500 sectors - Consumer Staples, Materials and Utilities - show insider optimism.

Corporate insiders have taken a sharply pessimistic turn - selling their companies' shares at the fastest rate in at least a decade.

That's according to InsiderSentiment.com, a website maintained by Nejat and Jon Seyhun. The former is a finance professor at the University of Michigan and one of academia's leading experts on interpreting the behavior of insiders.

In calculating their insider-sentiment indicators, the Seyhuns focus only on two of the three categories that the law defines as insiders (corporate officers and directors) and ignore the third (a company's largest shareholders). That's because Professor Seyhun has found from his research that these large shareholders on balance have no privileged insight into their companies' prospects. Because their transactions are typically several orders of magnitude larger than those of officers and directors, including them skews the much more valuable signals coming from officers and directors.

The insider indicator that the Seyhuns calculate is the percentage of all companies with any officer or director transactions for which there has been net buying. The past decade's average is 26%, and up until July this ratio had been slightly to moderately below this average. In the first three weeks of July, however, the insider buy ratio turned "deeply negative" - to 13.6%, its lowest in at least a decade, as you can see from the accompanying chart.

Furthermore, according to the Seyhuns' analysis, the insider selling has been across the markets: "Insiders are pessimistic on both growth and value, small and large firms, and winners and losers," they wrote.

The insiders' recent behavior doesn't mean the market will immediately crash. Professor Seyhun has found in his research that the insider buy ratio has its greatest explanatory power over a 12-month horizon. So, assuming the insiders' bearishness turns out to be justified, we don't know the path the market will take over the next 12 months - just that the market will be lower in July 2025 than it is now.

I last wrote about this ratio in April, when it also was bearish (though not as bearish as it is now). While the market is higher now, the jury is still out on whether the insiders' pessimism at that time will be vindicated. But the insider buy ratio's extremely bearish current reading increases confidence that their pessimism from three months ago will eventually be justified.

What are insiders worried about?

You might wonder what the insiders are so worried about. Corporate officers and directors rarely comment on their transactions - especially when they are selling shares of their companies - but it's likely insiders are worried about a possible U.S. economic recession.

Professor Seyhun, in an email, said: "In a deep recession, we would expect insider selling across the board. This recent insider selling in January to April and back again in July is looking like the beginning of a larger pattern of indiscriminate insider selling."

Sectors in which insiders are bullish

Though insider pessimism is dispersed across the S&P 500 SPX sectors, there are three in which on balance they're optimistic: Consumer Staples, Materials and Utilities. The table below shows three stocks from each of those sectors that have received significant buying recently from officers and directors. Most are smaller-cap companies, for example ASP Isotopes (ASPI) and Friedman Industries (FRD). The two largest-cap examples are Hormel Foods (HRL) and Avangrid (AGR).

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Nvidia, Super Micro, Broadcom - and 22 other stocks most likely to crash

Plus: Fearing a recession and a bear market? You now have one more reason to worry.

-Mark Hulbert

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

07-27-24 1035ET

Copyright (c) 2024 Dow Jones & Company, Inc.