(Bloomberg) -- Shares of US companies roared to a record this week, seemingly shrugging off worries about tariffs, immigration and inflation. Yet, company executives are doing something decidedly less bullish — they’re selling their stocks at a rapid pace.
A gauge of insider sentiment that tallies the number of buyers versus sellers shows there were just 98 companies where at least one insider purchased the company’s shares this month through Jan. 22, compared with 447 at which at least one insider sold, according to data compiled by the Washington Service. With a little over a week of trading left in January, that buy-sell ratio, at 0.22, is currently on track to be the lowest in data going back to 1988.
That amount of selling doesn’t usually inspire confidence with investors, since it suggests corporate leaders who run the companies lack conviction in their own stock. Yet such signals should be taken with a grain of salt, given there are many factors that can lead to a sale, including overall market performance, share value and the executives’ personal reasons.
Apart from a natural seasonality in the pattern of insider sales, this time they were were concentrated in the large technology companies that saw huge gains in 2023 and 2024, says Mark Hackett, chief market strategist at Nationwide.
“Following a tremendous two-year run in equities, particularly in the area seeing the bulk of the selling, it is natural to see a surge in selling,” Hackett said. “It is important to watch, as it could indicate fading confidence in the risk/reward profile of the group of stocks with elevated valuations; it is important not to react, as it could be part of risk control and may not reflect lack of confidence.”
That explains why another set of data helps paint a fuller picture of sentiment that companies have for their own stocks — corporate buybacks.
Data from Birinyi Associates shows buybacks for January are at the strongest level since at least 1999. Major US companies, including General Electric Co., Citigroup Inc. and Netflix Inc. have announced plans to buy back stock this month.
According to Jeff Rubin, Birinyi’s head of research, US companies have announced over $48 billion in buybacks through the close of Jan. 22, putting it on pace for the strongest January since 1999, the farthest that data goes.
Also, a large chunk of US companies currently are in a blackout period for buying back stock, given the ongoing fourth-quarter reporting season. However, that typically does not move the company insider buy-sell ratio in a material fashion, Washington Service said.
“There is often a big divergence between insider activity and company activity, even though the same people are making the decisions on both,” said Matt Maley, chief market strategist at Miller Tabak + Co. Company buybacks can also be bearish, given the theory that a confident management would typically prefer to re-invest into the business and grow it rather than return cash to investors, he said.
“However, when an insider decides to sell stock, it’s rarely a good sign,” he added.
The stock market is at a strange juncture right now. On one hand, equity indexes are powering to new highs with optimism that inflation is on the right path and the Federal Reserve will be able to keep lowering interest rates. Yet there are big risks looming from potential tariff wars, massive deportation efforts and uncertain geopolitics, all of which have the power to fuel prices higher, again.
Valuations, especially those of technology companies, are riding high too, making many worry about how much steam is left in the current rally.
For now though, investors are choosing to focus on the positives. On Thursday, the S&P 500 Index closed at a record, and after years of being led by the tech behemoths, more and more stocks in the benchmark have started to take part in the march higher as well. Market pros expect that to continue improving this year.
Still, the high level of company insiders selling shares can be reason for concern given they do have a track record of providing an early read on market direction over the years. The insider buy-sell ratio had jumped in August 2015 and late 2018, with the former preceding a market bottom and the latter coinciding with another one. In March 2020, corporate insiders’ purchases correctly signaled the bottom of a bear-market rout.
“The growth in buybacks could be more of a secular trend,” said Steve Sosnick, chief strategist at Interactive Brokers, noting that as equity-based compensation for employees become more popular, a lot of the buy backs are intended to offset that dilution. Buybacks are also a tool to keep stock prices elevated, he added.
However, “insider selling strikes me as the more bearish data point,” Sosnick added.