Can you use the aggregated opinion of corporate executives to reliably identify major stock market bottoms? The answer, surprisingly, appears to be "yes." | Brad Grounds - Blog

In recent weeks, market volatility has increased and the prices of the major market indexes has decreased significantly. The S&P 500, for instance, traded above 4,800 on an intraday basis less than a month ago, only to fall (ever-so-briefly) to a shade above 4,200 just last week – a decline of more than 10% in a relatively short period of time. This decline was notable not only for its speed but also for the fact that the market has not seen many declines of this magnitude for a prolonged period of time.

At the time of this writing, only a week and a half after the index touched just above 4,200 – the S&P has already rebounded above 4,500. For those who have been sitting on the sideline waiting for prices to reflect a compelling value, did the late January 2022 lows reflect such a buying opportunity? Did you miss your buying window?

The undisputed best stock analysts in the world – the top executive officers at all of the publicly traded companies listed in the US – sure didn’t think so.

But this article is not really about the most recent dip in the stock market and whether it was a good buying opportunity. That’s boring. And, frankly, who cares? If it was a bottom, then you’ve already missed it.

This article is about something FAR more exciting – namely, it is this:

After reading this article, you, as a retail investor, will have all the knowledge necessary to reliably and accurately call the absolute bottom of any major market decline, and, if you stay disciplined in keeping cash on the sideline waiting for such a bottom to occur (…and this wait can take years…) then you can earn substantial profits from doing so.

Sounds impossible, doesn’t it? If you’ve read the sentence above and are scoffing at the idea that someone could teach you to call market bottoms, I don’t blame you. After all, there is no analyst in the world – not even Warren Buffett himself – who has been able to do so. But I invite you to read this article in full and, upon completion, reconsider whether you now believe what I wrote above. I hope you enjoy!

The Key Metric to Watch:
Are Insiders Buying Abnormal Amounts of Their Own Stock in the Open Market?

Among all of the potential indicators that could signal a buying opportunity likely to result in substantial positive gains over any reasonable holding period, extreme aggregate open market buying activity of all of the top executive officers at all public companies is perhaps the most reliable and highly predictive of future returns. Specifically, in those rare circumstances when the top executive officers at an abnormally high percentage of public companies have made open market purchases of shares in their own companies, this has historically constituted an exceptionally strong, bullish sign for future price appreciation in the market as a whole over the six months to two years that follow.

Such signals do not arise often, but, when they do, it almost certainly means that you should become as fully invested in the market as you can. For the most cautious of the investing public – those who have a particularly high aversion to losing money and who prefer to invest only when the odds of a positive return are substantially stacked in their favor – this is the signal that such investors should be waiting for. This is the buying window that you’re waiting for.

And, if you are one of those investors, you’ll have to continue to wait on the sidelines, for insiders did little more than yawn at the thought of buying shares with their own money in their own companies – even when, at the January 24th close, the price of the S&P (and many of its constituent companies) had declined by more than 10%.

Historically Speaking, The Best Time to Buy is When An Exceptionally High Percentage
of All Executive Officers Are Buying Their Own Stock in the Open Market

Sure, markets sometimes make positive returns – even substantially positive returns – even when the aggregate buying activity by market insiders is well within normal bounds.

But it might surprise you to know that the highest levels of open market buying by market insiders, as a group, have historically coincided with every major market bottom over at least the last 18 years (which is as far back as my data goes). Put another way, this group, comprising all of the folks who actually run our public companies, have called – and profited from – every major market bottom. And we know they’ve done it, because they are required to report all trades in shares of their own companies… which means that retail investors can use these key moments as highly reliable guideposts regarding times when the market is significantly undervalued.

Many investors know that market insiders can and do generally outperform the market when they transact in shares of their own company. This is, of course, not surprising, given that they have access to more and better information than any non-insider investor ever could.

Many investors also know that this information is available on the web, though likely only a very small fraction actually track it in near real-time or regularly analyze such information to see whether it contains an investable signal.

To make this information more accessible to those investors interested in following this data, I have written this article (and may, in the future, write others) to answer one question:

What is the aggregate opinion of the folks who actually run our public companies about current market valuations?

Before getting into the results, I want to first describe the methodology used to derive an answer.

Identifying and Isolating Meaningful Information Embedded
in Aggregate Trading Activities of All Corporate Insiders

For transparency’s sake, I’ve described briefly below the primary steps necessary to cull the full data set of transactions by insiders in their own stocks into something meaningful, for, without substantially refining this data, it contains virtually no predictive power about potential future returns of the market as a whole.

Step 1 – Aggregate All Trades Made by All Insiders at All Public Companies for All-Time (or, at least, all-time since May 1, 2003)

I’ve written a program that compiles and analyzes this information regularly. My dataset, which is pulled directly from filings with the SEC, contains every single insider transaction of any kind reported for every single insider at every single company that has ever been a public company since May 1, 2003. There are literal millions of such transactions, all sitting in my database and updated regularly.

Step 2 – Screen for Open Market Purchases

From this data, I screen out all transactions other than open market buys (i.e., purchases on the open market by an insider using his or her own cash at current market prices). Based on both the substantial body of literature and my own analysis, this type of transaction contains – by far – the most predictive power about future returns. (As an aside, certain other types of transactions are relevant in very limited circumstances, but those are not the subject of this article.)

Step 3 – Screen for Executive Officers Only

There are three general groups of insiders that are obligated to publicly report their trades in a company’s stock. They are:

Executive officers of the company – Think CEO, CFO, COO, and certain other very high-level officers. The exact officers that constitute this group vary by company, but those who are deemed by their own company to be in this group literally run the companies on a day-to-day basis. This group possesses the highest possible level of knowledge about the company’s operations and prospects, which knowledge is far in excess of anything known by the investing public or even the company’s own public filings.

Non-executive members of the board of directors of the company – Though some directors are both directors and executive officers of the company, the group I refer to here is made up exclusively of people who serve on a public company’s board of directors but are not also employed by the company. This group is also highly knowledgeable and possesses knowledge about the company that far exceeds the investing public, but it is inferior to the knowledge of the company’s executive officers. There are at least a couple of reasons for this lack of knowledge. First, this group attends to the company’s affairs on only a part-time basis (perhaps as little as a few hours per month). Second, the information that is fed to this group – which occurs primarily through board meetings and materials circulated prior to such meetings – is filtered through management, is usually only of a “high-level” nature and often does not include important details that company execs decided not to include in board materials.

Owners of 10% or more of a company’s stock who are neither executive officers nor have representation on the company’s board of directors – This group has the lowest level of knowledge of the three types of insiders. And in fact this group should not be referred to as an insider at all, given that they possess no material non-public information about the issuer at all. They are better considered as an extremely well-informed public shareholder, though their knowledge extends no further than the public disclosures made by the company. Making trades or trying to divine market valuation signals exclusively on the basis of this group’s trades is a losing strategy.

Unsurprisingly, based on both my own analysis of the dataset described above as well as academic literature studying this same issue, the best and most accurate investment signals come from the most informed group with the highest amount of non-public information about the company – namely, the executive officers of the company. Hence, the insider trading dataset is further screened so that it includes only those open market purchases made by executive officers in the company that they are responsible for running.

At this stage, the dataset comprises only open market buys made by only the top executive officers of all public US companies. For purposes of the remainder of this article, I refer to this limited group of trades as “Executive Buys.”

Step 4 – Group the Data by Time Periods

Even having the screened data resulting from Steps 1 through 3 is not enough. The data must be further aggregated by time period to determine whether insiders’ trading activity is truly reflective of a highly bullish sentiment rather than just random statistical noise. I do so by grouping Executive Buys by three time periods:

Aggregate Executive Buys on a single day;
Aggregate Executive Buys in a single week; and
Aggregate Executive Buys in a single month.

The dataset, when grouped for each of the three time periods set forth above, is loosely correlated with returns over the subsequent 6, 12, and 24 month periods. For instance, returns are generally higher when a high percentage of public companies have at least one Executive Buy in a single day, week, or month, and are generally lower when a lower percentage of such companies report at least one Executive Buy over any of those periods. However, these predictors are only loosely correlated with relative market-level returns and are not strong predictors.

While this may qualify as a somewhat helpful, if weak, predictor of future market returns, it is not at all helpful to someone who, like me, prefers to wait on the sidelines with new money until the price of the S&P 500 is at or near a bottom and is almost certainly reflective of a truly compelling market valuation. To be clear, I am talking about a group of people who are willing to wait on the sidelines for substantial periods of time (sometimes even waiting many years), for this type of opportunity does not occur frequently in highly efficient public markets.

But, good news (and also bad)!

The good news first – Incredibly, the dataset that we have substantially culled through Steps 1 through 4 does provide a highly reliable indicator of market bottoms! I will detail how below.
The bad news? These signals are exceedingly rare, and they sometimes only occur once or twice in a decade. In other words, be prepared to wait… and wait… and wait…

Given the exceptionally low frequency of these signals and the fact that such signals are of almost no use if you are already fully invested when such signal arises (i.e., you need to have had substantial money on the sidelines prior to the time the signal occurred in order to profit; otherwise, you are merely recovering your pre-signal losses), it is reasonable to ask whether the value of a market bottom signal – even a highly reliable one – is of value to the average investor. Particularly for investors who typically remain fully or nearly fully invested in the market, this signal may be of little value. But for those investors who typically maintain a material portion of their portfolio in cash or cash equivalents, I would suggest that waiting for this signal can be immensely valuable – particularly if you use options to capitalize (but this is a discussion for a different time).

Step 5 – Compare Current Levels of Executive Buys to “Normal” to Identify Extreme Outliers. Screen Out All Data Other Than Extreme Outliers.

As with many other metrics in the stock market, the aggregate level of Executive Buys during any period – be that a month, a week, or even a single day – generally follows a normal distribution. I emphasize that this is true only most of the time, because, on rare occasion, this distribution produces extreme outliers that lie far beyond, and at a far higher frequency, than would be expected if this data were truly normally distributed. It might best be characterized as a normal distribution with an extreme rightward skew at very high z-scores. And it is these outliers that we really care about, for they cannot be characterized as merely a random but expected occurrence of normally distributed data. Rather, there is a reason why these data points skew so dramatically from what would be expected, and they represent those times where insiders are practically screaming out that current price levels in the market are virtually certain to produce enormous gains over the following six months to two years.

But to truly demonstrate the incredible predictive power and informational content of these outliers – which FAR EXCEEDS the predictive power of all of the rest of the data set – is with a snapshot of the data from the actual dataset we’ve created by following the five steps above.

Take a look at the graph below. This is among many graphs generated by the program I wrote to analyze Executive Buys over time. I’ll explain how to read the graph, and then below the graph I will describe how we can use this graph, in combination with another graph, to identify market bottoms in nearly real-time with remarkable accuracy!

Each dot in the graph below represents a distinct month during the period in question, which is May 2003 through January 2022.
The X-axis is time-based, as you can obviously see from the labels on the X-axis.
The Y-axis reflects the number of publicly traded companies that reported at least one Executive Buy in such month. So, for instance, we can see that the red dot furthest to the right on the chart below reflects January 2022. Just eyeballing the chart, we can see that executives at less than 100 public companies have decided to purchase shares in their own companies. The actual number is 66 (out of more than 5,500 companies tracked in the database for the same month), which is lower than every other month shown in the chart (though the fact that January is not yet over is certainly part of the cause of this number being so low).
Finally, you will notice that each dot is also color-coded. The meaning of the color scale is shown in both the colored gradient bar at right and the legend in the top left corner of the chart.
The z-score is the most important number on the chart, because it calls out which months are true outliers in terms of Executive Buys. And these are all we care about.
The z-scores are calculated in the normal way, and it is assumed that all of the data is normally distributed about its mean.

Z-scores of aggregate buys by all executive insiders by month calculated by Brad Grounds — Z-scores of aggregate buys by all executive insiders by monthSEC filings and analysis by Brad Grounds

So what does the chart above mean? And what does it tell us? There are a number of things that can be determined from this chart, but let’s just take the most obvious.

There are a number of extreme outliers in the distribution above. These are primarily reflected by the blue and green dots, though, as I will discuss later, a few of the yellow dots also qualify.
Let’s just see if we see anything that stands out to us about the dates that each of these outliers occurred.
The highest z-score occurred in the month of March 2020. The second highest occurred in November 2008. The third highest occurred in October 2011. Others occurred in March 2009, August 2015, May 2012, and November 2018.

What do these dates have in common? They are reflective of market bottoms.

March 2020 – Exact COVID bottom.
November 2008 – “Early” bottom of the Great Recession.
October 2011 – Exact bottom of that period.
March 2009 – Exact bottom of the Great Recession.
August 2015 – Exact bottom following sharp decline that summer.
May 2012 – Exact bottom of the sharp decline over the previous two months, after which the market went “up and to the right” and never looked back.
November 2018 – Exact bottom of the significant drops in the market that occurred during that time.

In fact, if Executive Buys are monitored simultaneously over monthly, weekly, and daily periods as described above, you would see that this group of insiders, though each expert only in the value of his or her own stock, have in the aggregate shown the ability to call market bottoms in nearly every major period of sharp market declines over the past 18 years!

A (Partial) Demonstration of the Truly Remarkable Predictive Power of Executive Buy Signals Regarding Future Stock Market Returns

I’m only scratching the surface of the predictive power embedded in the aggregate trading activities by executives, which, again, I am referring to as Executive Buys. By way of example and just to demonstrate a bit about how utterly amazing this information is, take a look at the chart below.

Before analyzing the chart, I first want to explain what you are looking at.

Blue area chart. The blue area chart reflects the closing price of the S&P 500 index on a weekly basis over a period of approximately the last 17 years.
Red vertical lines. The red vertical lines reflect the exact weeks when the aggregate insider trading activity of all of the top executive officers at all of the publicly traded companies in the US generated an “Executive Buy” signal.

As you look at the chart below, notice that almost every time the signal was generated, it coincided with a market bottom and/or occurred right before the price substantially appreciated.

Based on the chart above, the ability of these insiders to identify outstanding buying opportunities is obvious on its face. Each occurs shortly, if not immediately, after a substantial near-term dip in the price of the S&P 500. But it goes far beyond that.

Note, for instance, that two separate Executive Buy signals were generated at the literal market bottom of the Great Recession. These insiders literally called the exact bottom of the Great Recession! And all the information necessary for retail investors to identify and heed this call was publicly available information, capable of being acted on in near real-time. Let that soak in for a minute.

This group’s ability to call the literal market bottom of the Great Recession was no fluke. Take a look at the “COVID Crash” that occurred in March 2020. This time, these same insiders gave not two but FOUR consecutive Executive Buy signals (as evidenced by the thicker solid red line in the chart above). They again called the exact bottom of the COVID Crash! And yet again, all of the information necessary for a retail investor to identify this signal and act on it was available in public filings!

If you’ve just read these past two paragraphs and are not at this exact moment feeling both absolutely stunned and absolutely giddy, then you have failed to understand what you’ve just read. The point is obvious, but it bears repeating:

By using only publicly available information embedded within the aggregate trading activities of the top executives of all public companies in the US, you, as a retail investor can accurately call the exact bottom of major market declines and use this information to generate immense profits.

Literally no analyst or investor in the world has been able to forecast market bottoms with such precision and accuracy. Rather, it takes the wisdom of a crowd – the RIGHT crowd – to make such calls. What’s more, this group is making their opinion obvious and accessible even to retail investors. And now you know that you can harness this information for substantial potential future profits.

Is there room to quibble? “After all,” you might say, “the chart above indicates that this same group of insiders missed several other major market dips…”

It is true in the chart above that there appear to be several substantial market dips that, with the power of hindsight, would have been great times to invest available cash. And with that admission comes a couple of very important points.

First, the obvious (and less cheerful) point: these executives do not generate an Executive Buy signal during every single market dip that turns out to have been a great time to buy. They only do so when they collectively feel that the valuations of their own companies are most compelling.
Second, the less obvious (but more cheerful) point: these executives actually did generate an Executive Buy signal during additional of the major market dips above. But the signal was generated through either their daily trading activity or their monthly trading activity.
- Recall above that I stated that I screen for Executive Buy signals on the basis of three primary time periods – daily, weekly, and monthly. These three different time periods frequently generate overlapping signals (meaning an Executive Buy signal is generated from daily, weekly, and/or monthly data simultaneously – this is reflective of the strongest of the already strong Executive Buy signals).
- But sometimes an Executive Buy signal will be generated by measuring insider trades over one period of time but not another. There are multiple legitimate reasons that this may be the case. Just one example of which is a very sharp, but very brief, dip such that the daily and/or weekly signals are tripped but the dip was not prolonged enough to also generate a monthly buy signal. But, importantly, note that buy signals generated over each of the three measured periods are virtually equally valid and highly predictive of buy signals generated from analyzing different time periods. For instance, an Executive Buy signal generated from weekly trading data is highly predictive of future returns even if there was an absence of buy signals from both daily and monthly data.

Back to the hypothetical quibble about these insiders failing, on the basis of the weekly trade data shown in the chart above, to generate an Executive Buy signal during every major market dip, consider the following.

Market Dip in 2012 (right before prices went on a tear for the next 2.5 years) – Did These Insiders Miss this Dip? No! There was a major (but very brief) market dip in 2012 right before the market appreciated substantially over the next 2.5 years. It was not identified in the chart above based on weekly data. But this group of execs still generated an Executive Buy signal on the basis of their daily trading activities.
Major Market Dip at the very beginning of December 2018 – Did Market Insiders Fail to Identify This? No! While an Executive Buy signal was not generated on the basis of daily or weekly data, a very clear Executive Buy signal was generated on the basis of monthly data. Hence, yet again insiders identified the literal market bottom.

There is MUCH more I could share about this data and its incredible power, and perhaps in the future I will. But I hope after reading this note you’ll think twice before you invest new cash into the market without having serious conviction that it represents a compelling opportunity. As this data shows, IT PAYS TO WAIT FOR JUST THE RIGHT MOMENT TO INVEST… even if that wait extends for years.

Good luck!

About Brad Grounds

Brad Grounds’ bio is here.