Insider buying has soared as bullish executives invest in shares at high prices. And they are holding on to their purchases, writes Proinsias O'Mahony

DIRECTORS AT US and British companies have responded to heavy stock market falls by snapping up company shares in an "orgy of buying" that augurs well for future returns, according to market strategists.

"Insiders are more bullish than they have been in more than 30 years," says Ben Silverman, director of research for InsiderScore.com, a US stock tracking firm.

"CEOs are helping to lead the charge, buying at abnormally high rates, and selling in some sectors is almost taboo at this point."

Another firm that tracks insider data, Vickers Stock Research Group, confirmed the notably strong insider buying of late.

Vickers has found that US executives traditionally tend to sell shares between two and 2.5 times as much as they buy shares, with readings below two having bullish implications.

Currently, the sell/buy ratio stands at just 0.48, which means that twice as many corporate executives and directors are buying as they are selling.

David Coleman, editor of the Vickers Weekly Insider newsletter, says the "almost unprecedented" level of buying is an "exceptionally bullish indicator".

Insider buying has been evident over a "protracted period", he says, with increasingly bullish readings being registered for 10 consecutive weeks.

The broad-based nature of the recent stock market sell-off means enthusiasm is not confined to a particular sector.

"Whether it be in oil and gas stocks, financial names, technology or consumer staples, you can look across the board and see insider buying," says Coleman.

In Britain, company directors have been even more enthusiastic.

Khuram Chaudhry, chief European quantitative strategist at Merrill Lynch, says the ratio of buys to sells is "the highest on record".

Merrill data shows that a ratio of 5:1 - in other words, five buys for every sell in the market - has traditionally been followed by positive returns over the following one-, three- and 12-month periods.

The latest weekly reading shows an eye-popping ratio of 26:1.

While following the insiders has proved an attractive strategy over the years - numerous academic studies testify to this - things have been different during this financial crisis. When the crisis began in August 2007, heavy market selling was followed by an insider buying spree.

A rally ensued, but it proved shortlived. Indeed, some of the largest purchases came from misguided directors in the financial sector, with notable buying in evidence among officials at Fannie Mae and Wachovia. Similar patterns have played out this year.

Coleman agrees that some insider enthusiasm in 2008 has been misplaced. However, he says the recent buying is "on a different scale" from earlier buying sprees, "both in the level of buying being seen and the duration of it".

Merrill data confirms that the recent buying has been off the charts. In October there were 22 times as many insider purchases as there were insider sales.

The last time a double-digit monthly reading was registered was at the tail end of the 2000-2002 bear market, when heavy market falls saw directors stepping up to the plate.

Between 1986 and 2002, only three double-digit readings were recorded, with none matching the recent splurge.

Insider optimism is in stark contrast to the fear being exhibited by retail investors. The most recent poll by the American Association of Individual Investors (AAII) shows that just 24 per cent of investors are bullish while 57 per cent describe themselves as bearish.

A so-called "dumb money" indicator, such bearish readings are comparatively rare and tend to occur after rather than before heavy market falls. Consequently, bearish sentiment surveys have a reputation for marking intermediate-term market bottoms.

Whatever about retail opinion, the insider buying frenzy gives Coleman hope.

"The prevailing market uncertainty has contributed to the market's volatility and is likely to wane as governments become more transparent in their methods of tackling the current conditions in the global financial system," he says.

This, coupled with the fact that corporate insiders are putting their money where their mouth is, should provide a "solid footing" for eventual market advances.

Silverman says recent history and "irrational" market behaviour mean caution is demanded.

Still, the fact that company directors are now "using a stadium PA system to sound their message" is encouraging, he says.

"Historically, such sentiment spikes have signalled a bottom."