Predictive Odds of Insider Buying & Selling

1. An analysis of 4000+ insider trades found that following insider purchases beat the S&P 500 across various timeframes, with alpha increasing over longer periods. Over one year, insider purchase trades outperformed the S&P 500 by 17.6%
2. Research indicates a positive correlation between insider transactions, particularly those made by officers and directors, and future stock returns. Buy signals tend to be more predictive than sell signals
3. A study examining insider trades at over 3,500 U.S. companies from 2000-2007 found that trading by directors is predictive at both large and small firms while trading by officers like CFOs tends to be predictive mainly at smaller firms
4. During the COVID-19 market crash in February 2020, the Insider Sentiment Tracker showed a strong "buy" signal as insiders turned highly bullish against market panic. This preceded the market recovery in the following months
5. The Data showed that stocks with insider buying beat the market by 36.33%

However, it's important to note that not all insider trades are equally informative. To maximize the predictive power of insider buying:

• Focus on purchases rather than sales
• Pay attention to trades by top-level insiders
• Look for large-size trades
• Consider trades in smaller companies
• Watch for clustered trades (multiple insiders buying)

By focusing on these "high-conviction" insider transactions, investors may potentially capture alpha and generate higher returns

It depends. The quick answer is YES if it is most of the insiders' positions. Several studies have examined the impact of insider selling on stock performance, with some identifying certain levels of sales that carry greater predictive weight:

1. A study by James Scott and Peter Xu found that only large insider sales that accounted for a significant percentage of insiders' holdings predicted negative future abnormal returns. Conversely, small sales representing a small percentage of shares owned were correlated with significantly positive abnormal returns
2. Research by Dardas showed that insider sales transactions led to long-term negative excess returns. However, the study emphasized that not all insider transactions are equally informative, suggesting that focusing on 'high conviction' trades is crucial
3. An analysis of insider trades from 1987 through 2002 revealed that stocks with net insider sales produced positive (although not statistically significant) average excess returns in the subsequent three months. This finding contrasts with earlier studies that reported negative relative performance after insider sales
4. The study by Scott and Xu introduced a variable for shares traded as a percentage of insiders' holdings to differentiate between information-driven sales and those driven by liquidity or risk-reduction needs. They hypothesized that sales constituting a large percentage of holdings would be associated with negative future returns, while small fractional sales would predict positive future returns.
5. Research by Chang-Mo Kang, Donghyun Kim, and Qinghai Wang found that cluster purchases had larger price impacts and led to stronger market reactions than non-cluster purchases. While this study focused on buying, it suggests that clustered insider activity, whether buying or selling, may carry more predictive weight.

These studies indicate that the size of the sale relative to the insider's holdings, as well as the clustering of insider transactions, may provide greater predictive power for future stock performance.