Insiders Selling Heavily, Bearishness at 21-Year High! Expert: Market to Eventually Face 'Gravity Effect'

Corporate insiders' sentiment toward the stock market has reached its most pessimistic level in over 20 years, with experts warning that the market may eventually be dragged down by this bearish pressure.

Insiders, such as executives and directors, typically have deeper insights into their companies' prospects than ordinary investors, making their stock trading behavior a key market indicator. In July, insider selling of company shares significantly outpaced buying.

Nejat Seyhun, a finance professor at the University of Michigan and a leading expert on insider trading, tracks a preferred sentiment gauge: the percentage of companies where insiders show net buying, out of all firms with insider transactions. As of the last Wednesday of July, this metric stood at just 14.8%. If it remains at this level by month-end, it will mark the lowest reading in at least 21 years.

More concerning, Seyhun's research shows that heavy insider selling during market downturns is an even stronger bearish signal. It suggests insiders broadly believe the market won't rebound quickly, so they're not waiting for higher prices to sell.

Since July, U.S. stocks have weakened, with the Philadelphia Semiconductor Index briefly entering a technical bear market.

Insider bearishness has been persistent for years. Data from InsiderSentiment.com, a research site founded by Seyhun and his son, shows insider sentiment has been weakening for years. For most months over the past three years, the insider sentiment indicator has remained below its historical average.

Despite this, U.S. stocks have shown remarkable resilience against heavy insider selling, meaning the insiders' pessimism has so far been premature.

However, Nejat Seyhun believes the market will eventually succumb to this insider-driven 'gravity effect,' and it could happen sooner than expected.

Large-cap stocks face the most pessimistic insider outlook. Among large-cap companies with insider transactions in July, only 3.2% showed net buying, with nearly all others experiencing net selling.

Aside from consumer staples, only materials and utilities sectors have seen net insider buying. Notably, consumer staples are defensive stocks, which tend to outperform only when the broader market is weakening—making their relative strength a potential warning sign.