Are Insiders Predicting a Crash?
The headlines say you’ve been duped…
Corporate insiders are unloading shares at a wild pace just as average investors start to buy again. That’s right — the folks who know the most about the inner-workings of their companies don’t see a lot to cheer about in this market.
So they’re selling you stock and hitting the road…
How bad is it?
According to a report published by Argus Research, the sell-to-buy ratio for shares listed on the New York Stock Exchange registers at a staggering 9.2-to-1.
It gets worse. The last time this insider indicator was this lopsided was July 2011, according to Mark Hulbert. That was just before the debt ceiling debacle sent the market into a tailspin…
On the surface, these are scary numbers. In fact, the financial media has beaten the drum about the steady uptick of insider sales for weeks.
Now that the market is consolidating, worries are intensifying.
But hang on just a minute…
However bearish the numbers might appear on the surface, it’s a bad idea to use insider selling as your personal sell signal for the market at-large. If you did, you would have sold out in December (missing the entire post-fiscal cliff rally) as the ratio topped 8-to-1.
Also, it’s important to note that broad-based insider selling ticks higher when the market makes a strong push due to the triggering of stock options and other selling plans. Not all of the sales can be attributed to bearish outlooks.
This particular set of insider selling numbers could be skewed by some advantageous profit taking, according to Grace L. Williams over at Barron’s. Williams has tracked numerous cluster sells in larger companies that he attributes to selling into strength, while also noting that there are smaller companies out there where “convicted buying” is happening…
So should you expect a market crash as insiders head for the exits?
When the sell-to-buy ratio has hit these extremes in the past, Hulbert notes that the broad market has dropped an average of 2.1% over the next month. That’s right in line with a reasonable pullback after a strong January rally.