Only three S&P 500 sectors — Consumer Staples, Materials and Utilities — show insider optimism.
People who work for companies are selling their shares at the fastest rate in at least ten years, showing a sharp change in their outlook.
This is what the website InsiderSentiment.com says. It is run by Nejat and Jon Seyhun. The first person is a finance professor at the University of Michigan and one of the foremost experts in academics on figuring out what insiders are doing.
The Seyhuns only look at two types of people that the law considers insiders (corporate leaders and directors) when they figure out their insider-sentiment indicators. They don’t look at the third type, which is a company’s largest shareholders. What Professor Seyhun has found from his research is that these big shareholders don’t really know anything special about the future of their businesses. Adding them skews the signals coming from officers and directors, which are much more valuable, because their activities are usually many orders of magnitude bigger than those of officers and directors.
To find an insider indicator, the Seyhuns look at the share of all companies where there have been officer or board transactions and there has been net buying. The average over the last ten years is 26%, and this ratio had been slightly to moderately below this normal until July. The insider buy ratio dropped to 13.6% in the first three weeks of July, which is the lowest level in at least ten years, as you can see from the chart below.
Also, the Seyhuns found that insiders have been selling in all markets: “Insiders are pessimistic on both growth and value, small and large firms, winners and losers,” they wrote.
The recent actions of insiders don’t mean the market will crash right away. In his study, Professor Seyhun has found that the insider buy ratio is most useful for explaining things that happen over a 12-month period. So, if the bearishness of insiders turns out to be true, we don’t know what the market will do over the next twelve months. All we know is that it will be lower in July 2025 than it is now.
That was the last time I wrote about this ratio. It was also bearish in April, though not as much as it is now. Even though the market is better now, it’s still too early to tell if the insiders’ doubts at the time were right. But the fact that the insider buy ratio is currently very negative makes them more sure that their doubts from three months ago will be proven right in the end.
For what reason do experts worry?
You might be wondering what’s so important to those who are inside. Officers and directors of companies don’t usually talk about their deals, especially when they’re selling shares of their companies. However, it’s likely that they are afraid about a possible U.S. economic recession.
He wrote in an email, “In a deep recession, we would expect insider selling all over the place.” Insiders have been selling lately, from January to April and then again in July. This seems to be the start of a bigger pattern of selling without thinking.
Areas where experts are optimistic
There are different areas of the S&P 500 SPX 1.11% where insiders are pessimistic, but there are three areas where they are generally optimistic: Consumer Staples, Materials, and Utilities. The table below shows three stocks from each of those areas that managers and directors have recently bought a lot of. Many of them are smaller companies, like ASP Isotopes ASPI 1.85% and Friedman Industries FRD -1.31%. Hormel Foods (HRL 0.53%) and Avangrid (AGR -0.06%) are the two biggest companies in this group.
