You may be noticing how the media and financial news are doing everything they can to paint a rosy picture of the overall economy (i.e. Newsweek’s “The Recession is Over”, pundits celebrating “better-than-expected” news/earnings), but one thing that caught my eye that is not being focused on at all is insider selling.
Corporate insiders are dumping stock at an alarming rate. I seriously doubt that this implies insiders know the current market rally will be ending. What it does suggest is that maybe those who are on the front-lines of our economy are not quite the bulls the financial media has turned everyone into.
On a weekly basis, Vickers (published by Argus Research) reported that the ratio of insider selling to insider buying last week was 4.16-to-1, the highest the ratio has been since October 2007. Vickers also calculates an eight-week average of the insider sell-to-buy ratio, and it currently stands at 2.69-to-1. That’s the highest that this eight-week ratio has been since November 2007.
Jul 28, 2009
Insiders are selling
Commentary: Corporate insiders more bearish than at any time in nearly two years
By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) –
Corporate insiders have recently been selling their companies’ shares at a greater pace than at any time since the top of the bull market in the fall of 2007.
Does that mean you should immediately start lightening your equity exposure?
It depends on whom you ask.
But, first, the data.
Corporate insiders are a company’s officers, directors and largest shareholders. They are required to report to the SEC whenever they buy or sell shares of their companies, and various research firms collect and analyze those transactions.
One is the Vickers Weekly Insider Report, published by Argus Research. In their latest issue, received Monday afternoon, Vickers reported that the ratio of insider selling to insider buying last week was 4.16-to-1, the highest the ratio has been since October 2007.
I don’t need to remind you that the 2002-2007 bull market topped out that month.
To be sure, the weekly insider data can be volatile, especially during periods like the summer, in which the overall volume of insider transactions can be quite light. That is one of the reasons why Vickers also calculates an eight-week average of the insider sell-to-buy ratio, and it currently stands at 2.69-to-1. That’s the highest that this eight-week ratio has been since November 2007.
To put the insiders’ recent selling into context, consider that in late April, the last time I devoted a column to the behavior of insiders (and when the rally that began on March 9 was still only six weeks old), the comparable eight-week sell-to-buy ratio was just 0.72-to-1. ( Read my April 27 column.)
Why, given this, shouldn’t we be running, not walking, to the exits?
May be you should, of course.
But, in deciding whether to do so, there are several other factors to consider.
The first reason to be at least a little bit skeptical of insiders’ current pessimism is that they, on balance, failed to anticipate the 2007-2009 bear market. On the contrary, as I reported on numerous occasions during that bear market, they were largely bullish throughout. The average recommended equity exposure of Vickers’ two model portfolios, for example, was around 90% from late 2007 through the early part of this year.
What makes insiders more worth listening to now than then?
It’s a fair enough question, of course. What those who are inclined to follow the insiders can say by way of response is that insiders, over the years, have been more right than wrong — even though by no means infallible.
Another reason not to immediately go to cash in response to insiders’ increased recent predisposition to sell their companies’ stock: They are often early.
In fact, Investors Intelligence, a newsletter edited by John Gray and Michael Burke, bases one of its market timing indicators on how the insiders were behaving 12 months previously.
A similar point was made earlier this week by Jonathan Moreland, editor of the Insider Insights newsletter. While acknowledging that recent insider behavior “seems totally inconsistent with this rally continuing unabated,” Moreland went on to argue that “it may take weeks or even months for insiders to be proven right. Money can be made in the meantime.”
The bottom line? Insiders are not always right. And even when they are right, they often are early.
Even so, it’s difficult to sugar-coat the recent increase in the pace of their selling.