Insider Activity

One thing I get asked quite a bit about is insider activity. People want to know if a stock should move up on insider buying, or if it should go down on insider selling. Many will ignore perfectly good chart patterns if the insider activity doesn’t suit them, instead deferring to what company execs are doing over time rather than catch a swing trade for a multi-day move.

My personal stance on the topic is a simple one: I ignore it. Here are a few reasons why:

There are lots of reasons to sell. Maybe junior is going to college and a corporate executive wants to free up a little cash to pay tuition. Maybe they’re buying a summer home or a boat or a collector car. Maybe they’re even afraid their stock will go down. But don’t jump to the worst conclusion when you see insider selling, because you never know their motives. And even if insider buying is taking place, that sure doesn’t mean the stock will soon reflect that optimism. Corporate executives can and will be wrong often, so don’t bank on higher prices even if you see insider buying. They’re not the ones moving the stock anyway.

Good chart patterns should still play out. A bullish chart is based on recent supply & demand in the stock, so if the pattern confirms I’ll take that trade with managed risk. If it never confirms, I never take the trade and there’s no harm done. But what happens over time with insider activity isn’t what will drive the stock. Institutions (big funds) move the stocks, so if they’re accumulating or distributing stock, the chart will show it.

My timeframe is days, not quarters. Even if Joe Insider has been selling (or buying) shares for a while now, why would I care? Suppose it is based solely on where they think the company is headed, even if they’re correct it’s going to take lots of time to play out – usually several quarters at a minimum, and I’ll be long gone by then. Because stocks fluctuate, there will still be good moves taking place most likely in both directions, offering chart-based plays in the meantime for active traders like me.

Good trades still boil down to the charts and managing your risk. Don’t jump to any conclusions that a CEO or CFO is going to nail trades in their company’s stock. They aren’t traders, they’re businessmen! If you’re a short-term trader, insider activity should be the last thing on your list of things to consider before buying or selling any given stock.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]