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May 28, 2022, 6:27 a.m. EDT

Strong insider buying suggests a 15% rally in the S&P 500 from here

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By Michael Brush

One of the troubling things about this market downturn is that as brutal as it got, corporate insiders never showed much interest in their discounted stocks.

That’s changed in a big way. They’re bullish now — signaling the stock market is oversold and due for at least a short-term bounce if not more. Using history as a guide, the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.36% , the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.23% and the Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.35% stand to advance 15%-20% over the next three months.

How do we know? I’ve looked at the daily flow of insider buys for over two decades for my stock letter (link in bio below), so I have a good sense of when the volume and importantly the quality of insider buying picks up.

“Quality” means buying by insiders with strong records, buying by executives over directors who are further from the business, and bullish formations like cluster buys. All of these signals have improved significantly.

Insider services that track purchasing intensity have noticed the same thing. “We’ve definitely seen the ratio of insiders buying to selling spike,” says Mike Stein, research manager at The Washington Service. “They tend to call the bottom.”

“I think insiders are the smart money. They understand the companies,” says Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments.

Unlike me, Stein and Tengler are reluctant to say the bottom is in.

But the numbers sure do suggest this. Here are data demonstrating the strength of the spike in insider buying, followed by my take on three large-cap names insiders really like right now. It’s worth noting The Washington Service excludes 10% owners — money managers who often lag the market but have to report as “insiders” because of large positions — to focus on pure insiders. This means employees and directors.

First, the ratio of companies with insiders buying to those selling has doubled to 0.95 (chart below). That’s a big deal because it is twice the average of 0.47 since 2016, according to data provided by The Washington Service. The only other time this ratio surpassed 1 since then was during the pandemic panic selling in March 2020. It came close (0.94) in December 2018, the worst month of that year’s selloff. Three months after that buy signal, the S&P 500 was up 16%.

Todd Lowenstein, an equity strategist at The Private Bank at Union Bank, isn’t surprised insiders are buying hand over fist. “There is some good value emerging right now,” he says. “You can pick up quality businesses at a reasonable price.”

By dollars amounts, the ratio of buying to selling has tripled to 0.29. This compares to an average of 0.1 since 2016. This ratio also hit 0.29 in the December 2018 selling climax. Three months later, Nasdaq was up over 20%.

The ratio of the number of insiders buying vs. selling has more than doubled to 1.08. That’s a solid buy signal for me because this ratio has averaged 0.39 since 2016. The only other time it pierced 1 since 2016 was during the pandemic panic in March 2020, when it rose to 2.2.

Over at Vickers Insider Weekly it’s the same story. “Corporate insiders have reacted with increasing optimism, expressing confidence that historically has come in advance of notable rallies,” according to a note published by Vickers Monday.

Vickers’ one-week insider sell/buy ratio recently fell to 0.91. (Lower means more optimism.) This marks “a very rare period with more insider-purchase transactions than sales transactions,” says Vickers. The last time this happened was March 2020. Three months later the Dow Jones Industrial Average was up 35% and a year later it was up 70%. This ratio also fell below 1 in December 2018. The Dow then advanced 14% in three months.

Finally, big block sales are down sharply. Leuthold Group Chief Investment Officer Doug Ramsey prefers to gauge insiders by measuring big transactions of either 100,000 shares or $1 million. He subtracts buys from sells to find “net sells” as a percentage of issues traded on the NYSE. This fell below 1% May 20, boosting this measure to “maximum bullish,” he says.

Three stocks insiders love

There are literally dozens of attractive stocks to consider, based on bullish insider buying. Here are three from the large cap world.

Home Depot

/zigman2/quotes/210599714/realtime
US : S&P US
3,845.08
+13.69 +0.36%
Volume: 2.20B
July 6, 2022 5:43p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
31,037.68
+69.86 +0.23%
Volume: 292.71M
July 6, 2022 5:43p
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/zigman2/quotes/210598365/realtime
US : Nasdaq
11,361.85
+39.61 +0.35%
Volume: 4.17M
July 6, 2022 5:16p
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