This is the conclusion I draw from research conducted by Nejat Seyhun, a professor of finance at the University of Michigan and one of the leading academic experts on the interpretation of corporate insider behavior.

There are three categories of insiders, and only two are important for investors to follow, according to Seyhun: directors and company executives. Right now, according to its latest data, insiders in these two categories overall are pretty close to being in the middle of their all-time range between being extremely bullish or being extremely bearish.

Their current position translates into an expected return for the US stock market over the next 12 months that is only moderately below the historical average.

The third category of insiders, one that Seyhun’s research found not worth following, includes the biggest shareholders of companies. Since their trades are typically orders of magnitude larger than those of officers and directors, aggregate insider data will be dominated by that class of insider with the least knowledge. This is why Seyhun ignores these major shareholders when analyzing insider behavior.

The chart below shows insider stats that Seyhun says have significant predictive power. This is the six-month moving average of the percentage of publicly traded companies for which there are net purchases by officers and directors. Companies for which there is no insider buying or selling are ignored for the purpose of calculating this statistic. Its last value is 18%.

This may sound alarming to many of you, so it’s important to focus on two different characteristics of the graph. First, note that the indicator was at much lower levels in 2013 and that year and the following years turned out to be very good for stocks. Second, note that this insider indicator over the past decade has never exceeded 50%. Following the February-March 2020 waterfall decline, for example, when insiders as a whole were on the verge of being as bullish as they have ever been, the indicator is increased to 43%. His long-term average is in his twenties, barely higher than the last reading.

The reason the majority of companies experience net insider selling is that both executives and directors receive a large portion of their compensation in the form of shares in their company. While the acquisition of these shares never appears as purchases in insider data, the eventual sale of these shares will. So it makes sense that insider data is skewed toward more sales than purchases.

Another reason not to worry about what might otherwise appear to be excessive insider sales: Many insider sales are made for reasons that have nothing to do with their opinions on the prospects for their business. They may be needed to pay for a child’s school fees or to make a down payment for a house, for example.

It’s very different when an insider uses personal assets to buy more shares of the company. That is why you should focus on the percentage of companies that have net insider buys. Currently, this percentage is slightly lower than its historical average.

Mark Hulbert is a regular contributor to MarketWatch. Its Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at mark@hulbertratings.com

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