Form 4 Patterns That Predict Stock Moves (Data-Backed)
Cluster buys outperform single purchases by 0.9% monthly. Here are the insider trading patterns with actual predictive value, backed by academic research.
I've been watching insider trades for years. Most of them are noise. But every so often, a pattern shows up that makes me sit up straight.
Every time a CEO or director buys or sells stock, a Form 4 hits the SEC within two days. That's a live feed of what the people closest to the business are doing with their own money.
The problem is volume. Thousands of Form 4s file every week. Most are automatic tax withholdings, pre-scheduled sales, or tiny token purchases. The signal is buried.
This is how I filter for the trades that matter.
What Is Cluster Buying?
Cluster buying happens when multiple insiders at the same company buy stock within a short window, typically a few days to a few weeks.
One executive buying could mean anything. Three or four executives buying around the same time is harder to dismiss. Each person has their own financial situation, their own appetite for risk, their own reasons to be cautious. For all of them to independently decide this price is worth buying. That's a signal.
Academic research backs this up. A 2017 study by Allredge and Blank found that insider purchases occurring within two days of a peer insider purchase generated 2.1% abnormal returns over the next month, 0.9% higher than solitary insider purchases.
A 2018 study by Kang, Kim, and Wang found even larger gaps over longer holding periods: cluster purchases returned 3.8% over 21 trading days versus 2% for non-cluster purchases. The gap widened to 2.5% over 90 days.
Real Examples of Cluster Buying
Matador Resources, 2023-2024. According to 2iQ Research, shares dropped 23.5% through March 17, 2023. Five insiders then bought: the CEO, two directors, the EVP of Reservoir Engineering, and the President of Operations. From those March lows, the stock rallied 30.9% by year end.
When shares hit another 52-week low in September 2024, nine Matador insiders bought again: CEO, CFO, General Counsel, several directors, and department heads. Same pattern, different year.
Commerzbank, May 2022. CEO Manfred Knof, COO Jörg Oliveri del Castillo-Schulz, CFO Dr. Bettina Orlopp, and three board members bought shares together, spending approximately €490,000 combined. The stock rose roughly 70% afterward.
That's what high-conviction cluster buying looks like. Not one person nibbling. Multiple executives committing real money at the same time.
Buying After Bad News
The trades that interest me most happen right after something goes wrong publicly: an earnings miss, a guidance cut, a product delay.
From the outside, all I see is the headline and the price drop. Inside the company, people know whether this is a stumble or the start of something worse.
CenterPoint Energy, November 2023. CEO David Lesar bought approximately $1 million in shares on November 13. President and COO Jason Wells bought about $269,000 worth on November 9. This came after the company missed revenue estimates for the first time since 2020. Net income had fallen significantly over the prior two years. The stock was beaten up, and two of the top three executives decided that was the moment to buy.
They could have waited. They could have hedged. Instead, they added exposure when things looked ugly.
What I Ignore
Most Form 4 activity is mechanical.
Tax withholdings. When restricted stock vests, shares are automatically sold to cover taxes. Shows up on the Form 4 with an "F" transaction code. The insider didn't decide anything.
10b5-1 plans. Executives with large stock positions often set up pre-scheduled selling plans. A broker sells a fixed amount every quarter regardless of news. You'll see a footnote mentioning the plan. Treat it as background noise.
Routine director selling. Board members who sell small amounts after every vest, year after year, are just converting compensation to cash. Not a signal. What I watch for is the director who never sells suddenly dumping a large block.
The goal isn't to track every Form 4. It's to notice when something breaks the usual pattern.
Context That Changes Everything
A $500,000 purchase means different things depending on who's buying.
For a founder-CEO worth hundreds of millions, half a million is a rounding error. For a non-executive director making $300k a year, that same purchase is a serious commitment.
I try to estimate what the trade represents relative to that person's compensation and existing holdings. Proxy statements help. When the purchase is clearly a big chunk of their financial life, it carries more weight.
Valuation matters too. Insiders buying into an already-expensive stock is one thing. Insiders buying after the multiple has been crushed and the business hasn't obviously broken. That's different.
Research also suggests small-cap stocks show stronger insider signals. A 1998 study by Lakonishok and Lee found the most profitable insider transactions occurred in small caps, likely because these companies are less researched and have more potential for earnings surprises.
My Routine
I don't watch Form 4s in real-time. That's a recipe for overtrading.
Daily: Quick scan of new filings for companies I already own. Looking for open-market buys from senior people.
Weekly: Broader scan for clusters: companies where multiple insiders bought recently, or large purchases followed a big drop. Those become research candidates.
Monthly: Revisit the trades I flagged. Did the insiders' confidence play out? This builds intuition over time for which patterns work in the sectors I follow.
The hard part isn't getting the filings. You can set up a watchlist and let the insider feed surface them. The hard part is knowing which ones deserve a second look.
FAQ
Do insider buys actually predict stock returns?
Yes, on average. Multiple academic studies since the 1960s have documented that insider buying tends to precede better-than-average returns. The effect is strongest for cluster buying, small-cap stocks, and purchases made after price declines.
What about insider selling?
Selling is much harder to interpret. Executives sell for all kinds of reasons: diversification, taxes, buying a house, divorce settlements. A sale doesn't necessarily mean they're bearish. What matters more is unusual selling: someone who never sells suddenly dumping a large position, or multiple insiders selling together.
How quickly should I act on insider buys?
You don't need to race. Form 4s are public within two business days of the trade. The academic research shows returns persist over weeks and months, not hours. Take time to understand why they bought before deciding whether to follow.
Where can I find insider trading data?
The SEC publishes all Form 4 filings on EDGAR. For filtered views, you can use our insider transactions page or set up alerts on your watchlist.
Further Reading
- What Is Form 4? A Complete Guide: How to read the filing itself
- Insider Buying Trends by Sector: Where insider signals are strongest
- How to Research a Company Before Investing: Where insider data fits in a broader process
- 13F Filings: Track Hedge Fund Holdings: Institutional ownership data