Some investors get pessimistic about the stock market when they see selling by insiders in the U.S. blue chip stocks that 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 business.

Insiders in the U.S. have to report buying and selling to the Securities and Exchange Commission (SEC). 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.

Insiders buy and sell for various reasons

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.

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You would also want to weigh the insider’s investing skills.

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.

Insider trading is just one of many signs of investment value in blue chip stocks

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.

Everybody wants to find the financial philosopher’s stone: the foolproof market indicator that can tell you when or what to buy or sell in 10 minutes a day or less. They will never succeed, because no such indicator can ever exist.

By design, market indicators restrict the information they include to a narrow range, and reject everything else. The market responds to virtually anything that can influence the business of a company or the economy, though its focus constantly shifts.

That’s why we say investment success flows from mainly investing in well-established companies and spreading your money out across the five main economic sectors. (In the portfolio supplements we send out with each Wall Street Stock Forecaster, we give you the economic sector of each of our recommendations in that month’s portfolio.)

This may cut the excitement, but it will increase your long-term returns.