Small-Cap Insider Buys On The Rise

Lately, insider trading reports from small-cap companies have indicated that top executives of these businesses are buying more and more stock in their respective institutions, giving rise to the notion that optimism for the economy as a whole throughout 2010 is growing.

Insider trading can be used as a tool to test the overall forward-looking sentiment of the market - especially with CEOs of small-cap companies, who have more reasons to purchase their own stock than their large-cap counterparts. Thus, an increase in insider trading in small-caps can be used as a weathervane for the market as a whole - and the increase seen this year indicates a positive outlook.

The Russell 2000, the small-cap index, has dropped more than 10% this year. This correlates with an increase in insider buys, suggesting that opportunities are ripe within the sector to buy, and that small-caps in general are underperforming. Indeed, there has been a 35% increase in the amount of companies that have had insider buying sprees over the past month. Of course, one could cautiously argue that this is relatively small compared to the overall trend, but I would be willing to bet that this indicator at least is pointing towards a good 2010 trading year, especially for small caps with more upside growth potential than large caps in a recovering economy.