Modelling Insider Selling

Posted: 24th September 2009

Corporate insiders are selling – is it time to get out? One thing we always wanted to do with Recorded Future was to cross reference event types to find subtle relationships driving key trends and patterns. In the financial world insider trades are a great example of information to put together with both good news (company expansion, product launches, etc.) and bad news (restatements, management turn over, legal trouble) to look for powerful combinations.

Insider trading alone has long been known to be a powerful predictor of stock market directionality (typically with caveat that buys are a stronger predictor than sales) – and is frequently discussed in terms of the overall market as well as individual names.

We’ve now collected SEC Form 4 data for some time (and will soon go back in time to create a solid history) and aggregate it in real time (of filings of course) – and you obviously then start thinking “how does this change in real time”? So here it is – a view of sale/buy ratio in the market. It’s updated in real time (refresh the page to get the latest). The view is of actual “real sales/buys”, not program trading or options trades. Enjoy.

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Here at publication time (October 1st) we can see that ratio of sellers to buyers is definitely high – which others have commented as well; “Should You Be Buying If Insiders Are Selling?”. With the above you can easily keep watching this on a hourly/daily basis. Time to get out – officers and directors are?! 3 times as many insiders are selling shares as are buying.

BTW the blue curve is in realtime (which can be fairly volatile), the red is the 7-day rolling average, and the orange is the 14-day rolling average.

Now – what is exciting about this is not the predictive power in this data in itself (you can get that from lots of places), but where we can take it:

  • Break down by industry
  • Analyze and notify on individual companies
  • Looking at the market/segment aggregate of combined events (insider trading and bad news such as product/legal/accounting problems) and exploring individual problematic situations – from both a compliance and an opportunity point of view.
  • Perhaps the most powerful: identifying combined predictive signals/chains of events including insider trading that predicts stock price. If insider buying is a powerful signal, what about insider buying timed with product launches, company expansion, buybacks, etc?

Finally: we will be back soon to explore “interesting” combinations of directors/officers doing various activities curiously close to insider selling. Lots of good stories in that