Insider buying is surging. What investors need to know, and why it may not signal a market bottom
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Although corporate insiders are buying more stock than retail investors, they have increased their purchase of stocks in May. Retail investors should wait to follow their lead. According to The Washington Service data, the insider sell-value ratio was at its highest level since March 2020 through May 23. It was already the most significant month in 2019 with 1,200 inside buyers. This means that they were on pace to surpass sellers for the first two years. The buyers include CEOs at major companies, such as Uber CEO Dara Khosrowshahi, who bought $5.3 million worth of stock on May 6, according to VerityData/InsiderScore.com. Stocks that have fallen more than 25% over the past year are some of the most recent buyers. Professional investors often view insider buying as a positive indicator. Professional investors can see insider buying as a sign that executives or board members are optimistic about the company’s prospects. In general, the market’s bottom is when insider buys tend to rise. For example, the strong buying that occurred in March 2020 coincided with the bottom of the pullback and the market roaring back. The Federal Reserve intervened to help financial markets. The Washington Service data shows that insider buying rose in January 2019 right after the dramatic Christmas Eve selloff. According to Ben Silverman (director of research at VerityData), investors shouldn’t mistake this month’s rise for executives calling the end of the market sell-off. The buying is strong but not overwhelming. “Insiders in all of those times made extremely, very accurate market bottom calls. This was evident by the historical volume buying. Silverman noted that although the numbers now look great, they are still at the lower end of their peak during the previous periods. The earnings season may have also contributed to this month’s increase in buying volume. After companies release their results, insiders have more freedom to trade. Silverman noted that this effect tends to be stronger for the first quarter than it is in the first six months of May. According to VerityData research, the monthly buying activity has decreased. We wanted buying activity to grow and sustain itself for at least a few weeks. Silverman stated that instead, buying numbers have slowed down. Silverman maintained that he was optimistic that this level of buying indicates that certain stocks are being undervalued. He said that insider buying is particularly strong in Russell 2000 companies. These are just a few of the stocks that top executives purchased stock in the past month according to VerityData.
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