Murky Message: Insiders Dump Stocks at Record Pace

Insiders, like corporate officers and directors, are the smartest indicator of a company’s (and by extension the stock market’s) health. Unfortunately, getting access to good insider sales data is tough. Here’s one promising set of data though.

Nobody knows more about a company than its corporate officers and directors.

By extension, nobody knows more about the U.S. stock market than the sum of U.S. corporate officers and directors (also called insiders).

Up until 2013, Investors Intelligence used to publish helpful data on insider selling, but ever since it’s become difficult to get good insider sales data.

On Friday the Wall Street Journal published an interesting article on insider selling.

It refers to the research of Nejat Seyhun, a finance professor at the University of Michigan.

Mr. Seyhun puts an intriguing twist on insider sales as he strips transactions from ‘insiders’ who own more than 5% of a company’s shares.

Although the government considers 5%+ owners insiders, Mr. Seyhun has found that it is usually mutual or hedge funds that own 5% or more of a company’s shares.

This adjusted figure shows that insiders are currently selling six shares for every one that they bought, which is the worst Mr. Seyhun has ever seen.

Insider Panic – Immediately Bearish?

Is this an immediately bearish sign? Not necessarily. There have been two prior occasions when the adjusted insider ratio got almost as bearish as it is today – early 2007 and early 2011.

Those time periods are marked on the S&P 500 chart below.

How did the S&P 500 perform going forward?

It struggled higher before eventually succumbing to increasing selling pressure.

By nature, this indicator is not immediately bearish. To circumvent the appearance of selling before bad news hits the fan, insiders often sell well in advance of perceived (or expected) trouble.

In summary, based on insider selling we should stay tuned for a potentially nasty wave of selling.

Last week’s high volume sell off suggests that trouble may be closer than expected, but there’s a different way of looking at this classically bearish signal: Short-Term SPDR S&P 500 ETF Analysis

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

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Insider Selling of Stocks is at Highest Level for the Year

Insiders are fearful of an impending sell off. When this happened earlier this year the S&P 500 quickly declined 10%. Other sentiment measures are reaching extremes too, but there’s a silver lining.

All major U.S. stock indexes continue to trade near multi-year highs, but insiders are selling stocks of the companies they own or manage at a pace not seen at any other time in 2012.

Investors Intelligence reports eight sales for each purchase and considers the current rush for the exits “panic selling.” The question we should ask is, “what do insiders know that we don’t?”

Another sentiment extreme can be seen in the high yield bond market, more appropriately called junk bonds. Companies just issued the third-highest amount of junk bonds.

The prior records were set in October 2010 and May 2011. Those two dates are marked in the chart below. I’ll explain in a moment the significance of those two dates.

Mutual fund managers tracked by the National Association of Active Investment Managers report that managers have a median exposure of 95% to equities. This is close to a six-year high and sets an 18-month record.

The Dow Jones just went an entire quarter without losing more than 1%. Jason Goepfert with SentimenTrader took a look at what happens historically when the Dow goes an entire quarter without a 1% decline, while trading close to a 52-week high.

There were 16 such instances since 1900. Over the next six months, the Dow was positive every time with a median return of +6%.

Getting back to the two dates highlighted in the chart above, we are currently in a situation where sentiment is becoming extreme. But just as Advil covers up pain, QE3 tends to neutralize extreme optimism.

Back in October 2010 it took several months before sentiment extremes caught up with stock prices. In May 2011 however, it resulted in a nasty sell off.

From a seasonal perspective October is an interesting month. It has hosted a number of crashes but also a number of important lows.

Looking at stocks, we see that the S&P 500 (S&P 500 SPDR – SPY) has been trading in a well-defined parallel trend channel. The strategy – as long as the S&P remains within this channel – is to sell when it reaches the top of the channel and buy at the bottom.

Once the bottom (of the channel) falls out, it’s probably time to become more bearish.

The Profit Radar Report monitors literally dozens of sentiment gauges, seasonal patterns, and technical developments to identify high probability investment opportunities for the best investment strategy.