Corporate insiders who buy and sell stock within their own businesses have a better track record of timing their investments than the general population – but they tend to be a bit early in their market calls.
It’s often wiser to wait a while before following their lead and watch for further confirmation of a trend.
If that historical performance holds true, now may be a good time for investors to broaden their exposure to the TSX.
INK Research’s Toronto stock sentiment indicator has been on a steady decline since peaking in late May at about 220 per cent – meaning there were 2.2 stocks with key insider buying for every one with selling. Currently, it stands at 160.3 per cent.
Over the past 30 days up until Tuesday, the S&P/TSX composite index advanced a healthy 3.8 per cent. The gains may have helped quench the appetite of insiders to snap up beaten-down shares, but buying interest coming off its boil is often a bullish signal.
“Because insiders are early, it is usually better for investors to follow them down the sentiment hill rather than climb with them up to the peak,” Ted Dixon, CEO of INK Research, explained in a research note today. “At this point, we appear to be approaching mid-station on the way down the sentiment mountain. If that is the case, investor returns should begin to pick up speed.”
An even stronger bullish signal may be emanating from the TSX Venture exchange, he suggests. INK’s sentiment indicator for the exchange dominated by junior resource firms rose to above 800 per cent late this spring before easing back to the level of 632 per cent. The latest reading suggests there are more than six stocks with key insider buying for every one with selling.
“Venture stocks should do particularly well over the next month or two given the high level of insider buying we witnessed back in the spring,” Mr. Dixon said.
INK’s indicators are calculated by taking the number of companies with buy-only transactions involving officers and directors and dividing them by companies with sell-only transactions in the public market over the last 60 days.