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Jump in insider buying

A brief note on reading the tea leaves of recent insider stock buying.

(Photo: Getty Images)

There was a big jump in insider buying during the stock market swoon of August. In the U.S., executives bought over $860 million (U.S.) worth of shares in their own companies during the first 10 days of August, according to TrimTabs Investment Research. This amount was almost equal to the $1.16 billion (U.S.) insiders bought in March 2009, just before equity markets rallied.

Substantial purchases by insiders are usually a bullish sign since they know their companies very well. Academics such as H. Nejat Seyhun (author of Investment Intelligence from Insider Trading) have also studied insider buying and found that it is a good predictor.

However, insiders have been known to get blindsided by political and macroeconomic forces. TrimTabs notes that insiders “were also buying heavily in late 2007 and early 2008, right before the financial crisis intensified.”