It is always interesting to know who is buying and who is selling, when people are investing in stocks.
Recently we have seen a surge of buying by individual investors, however, at the same time corporate insiders have been selling at higher than normal amounts.
The month of January witnessed a record amount of purchases into stock based mutual and exchange traded funds.
This surpassed the previous record in February 2000, which was just before the market peaked in March of that year.
On the surface this would appear to be a negative sign for the stock market. However, in recent years investors have been withdrawing funds from the market, so some investors might be bringing back their stock holdings to more normal levels.
Corporate insiders as a general rule sell more company stock than they purchase. Most companies grant stock to their high level executives, as part of their compensation.
Since it is recommended that people maintain a diversified portfolio, it should not be too surprising to see executives sell their company stock.
This concept of diversifying away from company stock is also applicable to regular employees. Many companies offer stock to a large number of employees besides those in the executive suite.
Also workers can typically own the company stock in their 401(k) plan. If something negative happens to your company, not only would your job be at risk, but also your retirement funds, if you own too much company stock.
Insider buying normally provides more information compared to insider selling, since it occurs less frequently. When an insider who already owns stock buys more in the open market that is a bold move.
The one type of buying that is not be meaningful would be when a new company director buys stock, since that would normally be expected of him/her.
While some investors look at insider buying and selling, as a gauge to determine the attractiveness of a stock, there are some pitfalls.
Frequently an insider may be selling strictly for personal reasons. The family could be buying a new home, or they could have significant college expenses.
Generally it is best to look at insider selling and buying in its entirety across all companies. Late last year the ratio of selling to buying increased beyond normal levels.
There was some speculation that the selling was to lock in lower tax rates in 2012 versus 2013. However, the selling ratio has remained high thus far in 2013, implying that insiders are less positive about the stock market.
Given that the more informed investors are selling in greater numbers, and the less knowledgeable are buying is reason for some caution.
My sense is that the purchases by individuals can continue for some time, since alternatives such as bonds and money market are not very attractive.
Once a trend starts, it can go on for some time, as we have seen record levels of bond purchases for several years.
Since the stock market appears to be valued appropriately at current levels, I would not necessarily recommend selling now. However, I would use this information, as a sign to be a little more cautious.
Only those who are significantly underinvested in the market currently, would I recommend to initiate new positions in stocks.