Insider buying is one of the most telling market indicators.

When company insiders (CEOs, CFOs, major shareholders, directors, etc.) are bullish enough to spend millions of their own dollars to buy stock on the open market, it means they think stocks are cheap and worth owning.

However, when those same insiders are selling stocks en masse, the market is generally overextended and stocks (on a whole) are expensive. That’s when you want to exit stage left. Or at the very least, you want to sit on the sidelines and observe from a distance. (Continued)

Now is one of those times when you should either be a seller or sitting on the sidelines in cash. The ratio of insider buying to selling compared with the performance of the S&P 500 has a correlation.

Insider buying inversely correlates to the general market’s performance. In other words, when the market plunges, insider buying peaks. And when the market peaks, insider buying dries up.

During the crash of 1987, the number of firms with insider buying almost doubled. While the mainstream was panicking (and selling for massive losses), the smart money was buying.
The same thing happened during the collapse in 2001.

The ratio of insider buying to selling spiked twice between September 2001 and September 2002. During that time frame, the S&P 500 fell from 1,155 to 800. That was a good buying opportunity. The S&P 500 is at 1,240 today.

Insider buying is at a all time low lately. On May 8, the S&P 500 hit a new five-year high. So there aren’t many bargains on Wall Street. And as you would expect, the insiders are selling stocks at a greater pace than anytime in the last six years. The ratio of buying to selling is approaching 0.2 today, compared with well over 1.4 in 2001-2002.

This is a very telling sign.

The people who are running the companies you and I are investing in are selling their own stocks right now. These are the guys who know about future orders coming in. They know specifics market trends long before you and I have a clue. They know everything about their own balance sheets, income statements and cash-flow situations. Armed with all of this information, the insiders are saying, “Sell now, we’re getting the heck out of the market.”

Yet small investors keep buying.

This is a classic sucker’s rally. The smart money has been absent from buying. Only fools are buying now. They bid the prices up, and the people in the know sell out for a nice profit.

This situation can only end badly for the fools.

Now is a good time to take profits -- especially on speculative stocks that are selling way ahead of their underlying fundamentals.

Of course, there are still a handful of stocks that the insiders think are very attractive. Insider buying has not dried up completely.
Resource stocks still are undervalued to cash.