Some investors have told us that they are pessimistic about the stock market because of lots of insider selling in the U.S. blue chip stocks they hold.

The value of insider buying and selling as a market indicator seems self-evident. After all, company insiders — officers, directors, or owners of 10% or more of a company’s stock — are apt to know more than outsiders do about what’s going on in their businesses.

Insider trading: Not the conclusive indicator that many investors think it is

Insiders have to report buying and selling to the U.S. Securities and Exchange Commission. Many advisors claim that they can detect valuable investment opportunities, including rising blue chip stocks, by studying insider data. But the deeper you look, the more you’ll find that this data leads to muddled conclusions at best.

That’s why insider trading is only one aspect we consider when we select the U.S. blue chip stocks we cover in our Wall Street Stock Forecaster newsletter.

For example, it would help if you could categorize the clout that each insider has within the organization. You’d expect the CEO to have a better overall picture of things than the CIO (the chief information officer, who keeps the corporate computers running). You’d also want to grade the size of the transaction in relation to the insider’s personal wealth, and in relation to his or her stake in the company. You would also want to weigh the insider’s investing skills.

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Of course, if you look at insider trading data that closely, you’re down to a case-by-case basis. While you’re at it, you might as well look at whatever else you can find out about the company. That’s what we would recommend in any event. But it defeats the labour-saving purpose of using an indicator.

All in all, we think it’s a mistake to put too much weight on insider trading, since insiders can delude themselves about their employer just as easily as outsiders. However, it pays to remember that insiders may sell for a variety of personal reasons that have nothing to do with the company. On the other hand, insiders only make substantial buys for one reason — they think the company has attractive investment appeal.

Blue chip stocks: Our approach helps cuts risk — and gives you strong potential for long-gains

Instead of focusing too narrowly on single indicators like insider trading, we think you’re far better off investing according to our three-part program: invest mainly in well-established, dividend-paying companies; spread your money out across most, if not all, of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities); and downplay stocks in the broker/public-relations limelight.

This approach helps cut your risk. Plus, if you diversify as we advise, you improve your chances of making money over long periods, no matter what happens in the market.

You can get our full analysis of dozens of high-quality companies in the fast-changing U.S. market in our Wall Street Stock Forecaster newsletter. What’s more, you can get the latest issue absolutely free when you subscribe today. Click here to learn how.