Insider trading can give some critical information for investors. But you do not need to perform an exhaustive analysis of such trades in order to decide when a stock should get sold.
Daily and weekly charts of stocks will help you discover a true change in the character of a stock, then make the best decision on when to exit. One of the best sell signals in a strong stock after a healthy advance? When it loses support at the 10-week moving average, especially if it continues to sell off in heavy turnover. Another great sell rule? Take profits when a leader makes a final advance in a climax run.
And when it comes to picking great stocks, technical and fundamental ratings as well as chart analysis are handy and essential tools. The best growth stocks tend to be those that have a record of past growth and show technical strength. Strong runs by the biggest winners are not built on insider buys. Institutions, with their massive buying power and continuous purchases over weeks, if not months, make those rallies happen.
That said, when CEOs and senior executives make moves with their own shares, they are bound to attract a lot of attention. After all, these individuals would appear to have first access to information that may not be available to the public at the same time.
Sometimes that information is of the kind that could prompt investors to buy or sell the stock.
Yet executives also sell their companies' shares for multiple reasons. They may simply want to dilute a concentrated position. They may be making some tax planning moves, or raising the funds to buy a new house. Some even have a regular schedule for these trades.
Some observers tout that insider trading can indicate a bearish or bullish outlook for the stock or the whole market.
For instance, the Brooks ratio divides the total insider sales of a company by the total insider trades (including buys). If the average of this ratio for the thousands of stocks in the market is 40% or lower, the market outlook should be bullish. But if it is 60% or higher, the outlook is bearish.
Disclosure Rules For Insider Trading
The SEC has a set of rules regulating insider trading. Directors and people with a substantial position in the stock must disclose their positions and trades through specific forms. Form 4 records a transaction within two days while Form 3 shows the ownership stake. An employee must file Form 3 when receiving a significant stake in the stock. The window for this filing: 10 days. Meanwhile, Form 5 records earlier trades.
These forms are available for investors who want to track insider trades. However, the information alone may or may not significantly affect a stock's performance.
Schwab And Palantir
Newly public stocks can have significant insider ownership. SEC rules control IPOs through a lockup period when insiders cannot sell the stock. Once the period ends, heavy insider sales may sometimes to a significant decline.
Palantir Technologies went public in September 2020 at $7.25 a share and disclosed a 180-day lockup period. Though it was a direct listing that did not require this practice, the company went ahead with the lockup.
Shares rallied 276% from a post-IPO low of 8.94 to 33.65 in mid-February, when 80% of insider-held shares exited the lockup. Shares fell sharply amid insider trading, starting on Feb. 18. Those sales by executives and early investors from Feb. 18 to March 3 surpassed 2.5 million shares. PLTR plunged to 20.18 by early March.
Amid the bear market that began in late 2021, high-growth stocks bore the brunt of the selling. Palantir tumbled to as low as 5.92 by December 2022, an astounding 87% from its all-time peak of 35.
Insider buying can be a show of support as seen when Charles Schwab CEO Walt Bettinger bought 50,000 shares in mid-March. Shares gapped up 10%, reversing from a steep 68% sell-off amid the SVB banking crisis. However, the stock remains under intense selling pressure.
This article was originally published April 13, 2024 and has been updated. Please follow VRamakrishnan on Twitter for more news and stock analysis.
