Here’s how insider trading is impacting the stock market

Yahoo Finance’s Brian Sozzi breaks down why insiders are unloading amid the pandemic.

Video transcript

JULIE HYMAN: This is Yahoo Finance' Live. I'm Julie Hyman. We're going to take a look at what Brian Sozzi is watching today, as we've got futures trading lower. Perhaps some of the people selling today, certainly some of the people selling recently, have been insiders at companies, taking profits, in a lot of cases, after what have been very big gains for their stock.

So Brian, what do the numbers look like and what can we sort of take away from these numbers?

BRIAN SOZZI: Yeah. Just a little thing I often watch here, guys, insider selling. And I just got to give a hat tip to the folks at Barron's, who originally brought this to my attention a couple days ago in a story. But nonetheless, an index compiled by Thomson Reuters of insider sales to buys recently spiked to 143 to 1. That is the highest weekly reading in at least 16 years.

So what that chart you see on the screen now is suggesting, a lot of insiders, usually corporate insiders or CEOs, CFOs, COOs, they have started to dump stock. Now it's always unclear what the message is there from that insider selling. All the selling is prescheduled. But again, when you see a market hovering around record highs and you see selling pick up significantly here, as this chart would suggest, is usually not a good sign for the markets when they're near a record, insiders are selling.

And you always have to wonder, well, insiders are the ultimate insiders. They know what's going on in corporate America and inside their own companies. Why are they, in fact, selling?

Also worth noting here, let's go down bisectors here. I'm looking at where the selling is, in fact, happening. You're seeing the least amount of interest of insiders to actually go out there and buy stocks in the materials, discretionary, and financials. And you can see some of those sectors here. We use the ETFs here for each of those sectors. So you're seeing insiders in at least these three sectors not wanting to step up here and buy more stock.

And it's, again, it's interesting, because you're seeing record highs for the stock market. But within these sectors, you've seen a material increase in stock valuations and you've seen a material increase in forward earnings estimates for these sectors, in large part because on expectations of a very strong snapback in growth later this year.

But again, guys, I really do not like to see insider selling pick up in a material way like we're seeing right now. It's a little something, I think, investors should continue to keep an eye on.

MYLES UDLAND: Yeah, Sozzi. It's not anybody's favorite signal that they've ever seen out there, looking at broader market sentiment.

A couple of interesting points that I would make on the sectors that you've flagged. Financials, there's a number, a number of banks out there, big banks that we all know, that are trading 50%, 60%, 70% below their record highs hit back before the financial crisis. So you're talking about a lot of insiders who, when they were earlier in their career, probably invested a lot of stock that ended up expiring at nothing. And so any chance that they get, any sort of vesting event, they're going to take all that stock, [? taking ?] [? to ?] cash.

Discretionary is an interesting one. Because you know, we've seen such a strong bid in that sector for what can tend to be a little bit of a sleepier part of the market. So not a huge surprise. And I think materials kind of fits that same bill, where you've got all this optimism around the beginning of an economic cycle, which we only hope comes up every so often, right. We don't want there to be the beginning of economic cycles frequently. And you can kind of see the ebbs and the flows here over time. We had a lot of, actually, insider buying if you go back about a year. And then you see this optimism around infrastructure, around just an upturn in the economy. And so taking an opportunity to sell there.

Again, not trying to spin this in a bullish fashion for the broader market. As you noted, Sozzi, not the most constructive thing you've ever seen. But I think some interesting stories just within those specific sectors on what could be motivating management teams there, as you outlined.

JULIE HYMAN: I also have to wonder how much the IPO and SPAC boom has contributed to this. If you're a CEO at a company that's coming public through a SPAC, I don't know what the regulations are or what some of the lock-ups are for that. But you would think some of those folks are probably cashing in, to some extent. And I don't know how that also figures into the various sectors that we were looking at, if SPACs and IPOs are more common in those sectors. But I'd certainly be curious to see, in addition to some of the early seed investors who might be getting out of these things or lightening up, at the very least, if there are also executives who are doing so.

So we'll see, I guess, if we can get some more granularity into the numbers and also if they are indeed any kind of forward indicator. We'll just have to wait and see what time tells.