Did Insider Trading Predict the 2020 Stock Market Crash?

During the market crash due to the COVID panic of March 2020, corporate insiders were able to come out strongly ahead as evidenced by their insider transaction data. How were insiders able to foresee the recovery , buying at the bottom, and how can retail investors learn from the activity of corporate insiders? In this article, we will answer those questions.

Corporate insiders are in a special position. Often C-level executives at their companies, they have knowledge of many secret workings and happenings in the business that the public is not aware of. Additionally, they have a specialized set of skills and expertise that makes them uniquely positioned to assess trends in their industry given shifting macroeconomic conditions. 

Does this give corporate insiders, in the aggregate, an ability to actually predict how the stock market will move - and make trades according to that predictive ability? Here we will examine the evidence for this hypothesis using the 2020 stock market crash as an example.

Background

It's been a few years already, but let's recall the situation leading up to the March 2020 stock market crash. Remember, this was before the habitual mask wearing, fear of getting people sick, general hysteria that we remember from the COVID period had set in. In January and February of 2020, we had just started hearing about a mysterious illness coming out of China, with videos of random individuals suddenly falling over appearing all over social media. 

The stock market was still climbing at this time, with the S&P 500 just having passed the $3,000 mark a few months previously. Concern accelerated its seep into the market as cases started building up in February. The stock market then started going down in late February, eventually bottoming out in March 2020 at a close of $2,305. Soon after, the government began heavy stimulus spending, and the stock market subsequently started trickling back up. It would recover to pre-fall levels in August. You can see this in the stock price chart below.

So what were insiders doing around this time? Were they panicked like everyone else, selling into the fear? Well actually, it's quite the opposite.

Evidence from Corporate Insiders

The evidence from publicly available insider transactions that we've analyzed here at InsiderSentiment.com shows that insiders were unbelievably bullish while the market was tanking in March 2020. In fact, in the data we have going back to 2013, they've never sent a signal as bullish as this one. Take a look at the following chart showing the ratio of companies with net positive insider buying each month. You can see the purple peak in March 2020, indicating that insiders were buying massively during this time as the market was crashing downward towards a cliff.

We believe this is a remarkable finding. That amidst all of the chaos and uncertainty, with the media sending nonstop scare signals that caused most people to panic, insiders were not panicked at all. Not only were they not panicked, they were bullish. But again, not only were they bullish, they were more bullish than we've ever seen in all of our years of looking at the data, buying in massive amounts while the market was tumbling.

(Note: The realizations of the Insider Sentiment Tracker shown above here are backwards looking data that incorporate late filings, not snapshots of data that occurred live on those days. There can be a discrepancy between those two series as, though insiders are legally required to report transactions within 2 business days, many times they report them later than this. Investors should keep this in mind when viewing data on the Dashboard.)

Let's now look at how other investors did during the same period to give some comparison to insiders' performance during this time. The following chart from Morningstar shows that most investors were not able to do what insiders did in March 2020. Rather than see the coming boom and buy, most investors were scared by all of the negative messaging and fled to cash. You can see this in the blue line in the chart below:

In doing so, they missed out on much of the market gain that followed with the rebound and their portfolios suffered as a result. Insiders on the other hand were able to take advantage of this shock and come out ahead. Investors being aware of insider sentiment during this time could have prevented the panic that caused them to switch to cash right as the market turned around.

Summary

The March 2020 stock market crash and subsequent recovery gives us a strong takeaway about the predictive ability of insider sentiment. That is, corporate insiders were doing the opposite of investors at large were doing at the time, buying while the market was crashing down, and they were correct in doing so.

One possible explanation that explains how they were able to achieve this has to do with what we alluded to earlier. Given their position in their companies and industry, insiders have an ability to better forecast trends than the average investor. Taken in the aggregate, this means insider sentiment has value as a forward looking macroeconomic indicator, as each insider will be making a similar calculation based on their expertise, and their resulting trading activities will be captured by insider sentiment in the aggregate. See our other blog articles for more explanation on this topic.

We invite you to follow along with what insiders are doing by subscribing to the dashboard at InsiderSentiment.com so that you don't miss the next big signal.

Authors’ disclosure: This article expresses the authors’ opinions. None of the authors have any business relationship with the company who are mentioned in this article. This article does not constitute any recommendation or advice as to whether any investment is suitable for any particular investor. Consult with your licensed financial advisor before making any investment decision. This article was passionately written by a real human being without any "assistance" from "artificial intelligence", and we hope you enjoyed it!