Corporate Insiders Have Signaled that the Market is Likely At or Near a Bottom (S&P 500 at 3,670 - June 2022) | Brad Grounds - Blog

For the first time since the very bottom of the COVID crash, the undisputed best stock analysts in the world – the top executive officers at all of the publicly traded companies listed in the US – have signaled that the price of the S&P 500 today represents a compelling buying opportunity. And this same group of insiders has been remarkably accurate in calling most market bottoms over the past 20 years.

Even better news – at the time of this writing, the price of the S&P 500 closed at about 3,670, which is about 5% lower than it was when insiders gave their “buy” signal. This means that you could buy at a lower price than the price at which a large amount of executive officers bought their own company’s shares.

Analyzing the Recent Executive Buy Signal

Let’s now examine the recent Executive Buy signal and what it could mean about the future returns of the S&P 500 (with such returns measured on the basis of a “buy today and hold for one year” basis).

The analysis below is based on an analysis of every open market insider purchase made by every “Section 16” executive officer at every publicly traded, exchange-listed US company for the period from 2003 until today. The exciting conclusion of this analysis is as follows:

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.

In fact, it would be accurate to go much further than the statement above. Though it might be difficult to believe, it is also accurate to state that this same group of executive officers have called the precise bottom of virtually every major market bottom from 2003 to present.

So what are insiders saying right now?

Take a look at the chart below, which shows the closing prices of the S&P 500 year-to-date 2022. The year started out strong, with the S&P 500 trading at about 4,800. Since that time, I count four major dips, as noted in the chart below.

S&P 500 YTD in 2022, with insider buy signals noted.

As can be seen, an Executive Buy signal was generated on May 20, 2022. It was the first such Executive Buy signal in the past ~2 years. On that day, the S&P 500 dipped to an intra-day low of 3,810. Over the next few weeks, the S&P traded up, before falling off a cliff during the week of June 13th through June 17th. On June 17th, which is the time of this writing, the S&P 500 closed at 3,674 – which is approximately 5% lower than the price at which insiders generated an Executive Buy signal.

It will take two more business days (the statutory deadline by which executive officers must publicly report their trades) to determine whether corporate insiders generated yet another Executive Buy signal last week. But whether another such signal was generated or not is insignificant to a retail investor with cash on the sideline. The takeaway is clear:

Corporate insiders – the very people who literally run all of the publicly traded companies in the US – thought valuations were compelling enough that they bought stock in their own companies at abnormally high levels.
Almost every time this has occurred over the past two decades, it has signaled a major market bottom.
Price levels are now 5% lower than where insiders felt compelled to buy, meaning that an investor who buys at today’s prices is getting a 5% better deal than the corporate insiders did.

In sum, today’s price in the S&P 500 – which stands at 3,674 – represents, to me, an attractive (and possibly highly attractive) market entry point. For investors with cash on the sideline, now may be a good time to consider deploying it.

Some Words of Caution

It is important to note that, while corporate insiders have an unblemished track record of calling market bottoms, not every such purchase generated a positive return over the next 1- and 2-year period (though the vast majority did). In particular, it should be noted that in cases where only a “semi-strong” Executive Buy signal occurs, the odds of a negative return over the subsequent one to two years are higher. And, as I will detail below, the insider buy signal that was generated on May 20, 2022 was of the type that I would categorize as only “semi-strong.”

Differentiating Between Strong vs. Semi-Strong Executive Buy Signals

So how can we differentiate between strong and semi-strong Executive Buy signals? Essentially, we are measuring just how “abnormal” is the level of insider buying relative to history. Although the lines of demarcation are somewhat arbitrary, I define a “semi-strong” Executive Buy signal as one that is between three and four standard deviations above the median and a “strong” Executive Buy signal as one that is four or more standard deviations above the median.

This will all become clearer if you look at the chart below. Let me explain how to read the chart.

The Y-axis represents the one year return of any particular trading day during the time period in question (2003-present). A reading of 0.4, for example, reflects a 40% one year return.
The X-axis represents the “z-score” for Executive Buys on any particular day – meaning, in this case, the number of standard deviations above or below the median that any given day’s level of Executive Buys represents.
The dark black horizontal line represents a one year return of 0%.
Semi-Strong Executive Buys fall within the he dotted black vertical lines. These are set to z-score of 3.0 and 4.0 and delineate what I call “semi-strong” Executive Buys.
Strong Executive Buys have z-scores of greater than 4.0.
Each dot is color coded by a metric relating to its z-score.
Note that the data in the chart below is daily data, but I also measure this data in other ways (which may be discussed in other articles).

At a high level, what does the chart above tell us?

For Semi-Strong Buy Signals. If we look only at the dots located between the two horizontal dotted black lines, we can see the one year returns for every single “semi-strong” Executive Buy signal over the past ~18 years. Note a few things:
- First, there aren’t many dots, which means that we don’t get this signal often (as we would expect, given that these are 3+ standard deviations above the median).
- Second, if someone bought on the basis of the signal then such person would have earned a positive return on 79% of such trades.
- Note, however, that mirroring 3 of the 29 total Semi-Strong signals would have gone very badly (each with at least a 40% loss). Each of these trades was made when the yield curve (as measured by the 10-year less the 3-month) was predicting a recession would begin within less than a year of the date that the trade was made. I could go into substantially more detail, but this is not the case today and so I believe those three data points should carry little weight when analyzing the current semi-strong buy signal. However, the point remains that, based on history, the odds that the market will be lower in one year than it is today following a semi-strong Executive Buy signal is small but not zero.
- The median one-year return of all previous semi-strong Executive Buy signals is approximately 21.5%, which certainly reflects an attractive return.
For STRONG Executive Buy Signals. All strong Executive Buy signals are shown in the upper right quadrant of the chart above. They are all to the right of the second vertical dotted line, as the frequency of executive buys on these days was at least four standard deviations above the median (and, in some cases, far above four standard deviations). Note the following:
- Strong Executive Buy signals are extremely rare. This again means that we should pay attention when one occurs.
- In the past 19 years, there has never been a strong signal that generated a one-year return of less than 15%. And the median one-year return for all strong signals is in excess of 30%.
- Based on history, an investor would strain to find a signal that has more reliably predicted a highly attractive market entry point than a strong Executive Buy signal from executive officer insiders. Not only do these buys all correlate with major market bottoms, but they have all achieve highly attractive returns.

How Was All of the Insider Purchasing Data Analyzed?

I have previously written a detailed post about what this signal is, how it is generated, one way it is measured, and the stunningly good historical track record of the collective opinion of corporate insiders. For background, I recommend reading that article.

I won’t rehash the last article much here, except to say that the analysis above is based on an analysis of every open market insider purchase made by every “Section 16” executive officer at every publicly traded, exchange-listed US company for the period from 2003 until today. The exciting conclusion of this analysis is as follows:

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.

That’s the good news.

But here’s the bad news. These buy signals do not come along very often. In fact, it can be years between buy signals, meaning an investor must be extremely patient to wait (… and wait … and wait…) for a buy signal to be generated before investing new money into the market.

But now back to the good news again – for the first time since the height of the COVID crash in 2020, we again have a buy signal. Historically speaking, this means that now is likely a very good time to buy into the S&P 500. But, importantly, this only holds true if your expected hold period is at least a year.

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

Before we discuss the most recent Executive Buy signal, it would be helpful to briefly examine just how remarkable is this group’s track record. This is important, as it will highlight how fantastically bullish the recent buy signal is, which 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. Note that the chart ends in January 2022 and does not run to present day (we’ll examine 2022 later).
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 completely 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 nearly 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 from the previous article 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.

Conclusions

Circling back to the current semi-strong Executive Buy signal, I believe that, based on the exceptional track record of this signal as an indicator of both market bottoms and attractive one-year returns, investors would be wise to consider buying the S&P 500 (or any other broad market index) at today’s prices. Many people are fearful, and some even predicting a recession.

But do you know who isn’t fearful about using their own cash to buy into the market at today’s prices? The executive officers who actually run the companies that make up the market, that’s who. Based on their exceptional track record and with the S&P 500 trading in the 3,600s (5% below where many insiders bought in), I believe it would be wise for an investor to mirror the insiders’ confidence and buy into the S&P 500 now.

About Brad Grounds

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