By Matthew Carr
Every investor is looking for an advantage.
Sometimes, the easiest and most profitable way to get an advantage in trading a stock is to follow an indicator originating from the company itself. And I don’t mean an earnings report, a conference call or an interview by the CEO on some financial media program.
Undoubtedly, those contain powerful pieces of information. But by the time everyone sees it, the stock has already started moving.
Investors need an indicator that alerts them to a company’s potential before it makes headlines… And thankfully, there is one.
I’m talking about insider trading activity.
Now, this isn’t the illegal kind of insider trading where people try to beat the system and end up in jail.
This is the legal kind, where officers and executives of a company file paperwork with the government, letting everyone know – at least those who are looking for it – that they really like (or hate) the prospects of a company they work for.
It’s simple. But it’s one of the most effective investment strategies.
Let’s look at how the Guggenheim Insider ETF (NYSE: NFO) has performed year to date compared to the broader indexes…
As you can see, the ETF is up more than 15%. That puts it ahead of the 10% and 11% gains for the S&P and the Dow.
All the ETF does is focus on companies that have favorable insider buying activity.
In his book, Investment Intelligence From Insider Trading, University of Michigan finance professor H. Nejat Seyhun studied the impact of insider buying on returns from 1973 to 1994. It was a massive study, including hundreds of thousands of trades. And it shed light on the true power of insider transactions.
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Seyhun found that after months in which insiders were net buyers of a stock, that stock would return an average of 24% over the next 12-month period. And if there was no insider selling in the 12 months preceding the insider buying spree, the one-year return increased to 30.5%.
On the other end, if there was no insider buying preceding insider selling, the stock’s return over the next 12 months fell to just 9.5% on average.
Ultimately, what Seyhun discovered was that stocks outperformed the market by 4.5% following insider buying. And they underperformed the market by 2.7% following insider selling.
Year to date, the Guggenheim Insider ETF is outperforming the S&P 500 by 4.73%. It’s leading the Dow Jones Industrial Average by 3.58%.
But Seyhun isn’t alone on the subject. The research firm Market Profile Theorem found that insider transactions preceded a major shift in market sentiment. That shift could be bullish or bearish, depending on whether insiders were buying or selling.
A shift in sentiment can alter the fortunes of a stock.
This indicator works great in the short term, but it’s quite powerful in the long term as well.
Over the past 10 years, the Guggenheim Insider ETF is up more than 96%. That’s considerably better than the 66% gain we’ve seen on the Dow in that time. And it’s even higher than the 69% gain of the S&P 500 …read more
Source:: Investment You
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