What Insiders Really Think About the Bear Market

As the market has plummeted, you've heard plenty of executives telling you that everything's going to be OK. But if corporate insiders aren't putting their money where their mouths are, why should you believe them?

Company executives and other insiders are required to report when they buy or sell shares of their company's stock. Looking at patterns of insider activity gives you valuable objective information about what the people closest to a company's operations think about its potential success. Also, when you hear executives make positive comments about a stock, looking at their trading lets you judge their credibility.

Overall optimism
In general, corporate insiders have been relatively positive on the prospects for their stocks. Statistics from Argus Research show that although insiders are still selling more stocks than they're buying, the ratio of sales to purchases has been significantly lower than normal throughout the market's decline over the past year.

Looking at some specific companies, you can definitely see that optimism from insiders. At Chesapeake Energy (NYSE:CHK), for instance, Chairman and CEO Aubrey McClendon has been a one-man purchasing machine, with dozens of purchases totaling more than 3.3 million shares in just the past six months alone. Those purchases have been extremely profitable for McClendon, as shares have skyrocketed this year in response to higher natural gas prices and the success of new finds like the Haynesville shale play.

On the other hand, insider buying isn't a perfect indicator. Several insiders at IndyMac Bancorp, for example, bought shares last year and this year, as the stock fell from around $30 all the way to just pennies per share. Those who relied solely on those insiders to justify their stock purchases lost everything as a result.

Specific pessimism
Although overall insider sentiment may be relatively complacent despite the bear market, some corporate executives don't see things as positively. Here are a few of the many stocks with heavy selling volume over the past six months:

Source: Yahoo! Finance, Capital IQ.

You might expect that all these shares would have fallen after such heavy sales. But looking at the actual share performance, it's tough to see any real pattern. Some of these stocks are up, while others are down.

Insider sales don't give investors as strong a perspective on a company's prospects as insider purchases do. That's because there are many different reasons why insiders sell company stock. With pay packages typically including stock options or restricted stock, executives can't get paid their full compensation without selling shares.

Seeing insiders sell off some of their holdings after their stocks have had a nice run is understandable. But when things aren't going as well for a company, it's really troubling to see insiders seem to join the stampede at a critical time for their business. When executives rush to cash in even when share prices have fallen dramatically, it's tough for you to have any confidence that things will get better anytime soon -- no matter what they may say in news conferences or press releases.

Executives on your side
Owning shares of companies with insider buying makes a lot of sense. When executives and other corporate insiders hold onto significant positions in their companies, you know that they believe in their businesses and share your interest in seeing share prices rise over time. That insider confidence makes it much easier to feel good about holding onto your shares, even when the market's pulling everything down. Often, that's what gives you the patience to hang on and eventually turn paper losses into profits.

For more from corporate executives, read about:

• The stocks insiders are buying now.
• Picks for the top five insider-owned stocks.
• How to solve CEO problems once and for all.