While insider buying (which is done for one reason) is far more important than insider selling (which can be done for various reasons), the contrarian view of the latter is that in excess in can be a sign that the insiders are getting out while the getting is good. Mark Hulbert has an update on this indicator at Marketwatch this morning.
- Consider an insider indicator calculated by the Vickers Weekly Insider Report, published by Argus Research. The indicator is a ratio of all shares that insiders have recently sold in the open market to the number that they have purchased. For the week that ended last Friday, this sell-to-buy ratio for NYSE-listed shares listed stood at 9.20-to-1. That means insiders of these companies, on average, were selling more than nine shares of their firms’ stock for every one that they were buying.
- The last time a weekly sell-to-buy ratio was worse than this was in late July 2011, right before that year’s debt-ceiling debate began to spiral out of control. Over the next couple of weeks, of course, as the U.S. Treasury’s credit rating was downgraded, the Dow Jones Industrial Average lost some 2,000 points.
- To be sure, insiders have been selling heavily for several weeks now, and the market has continued to rise — including the Dow’s eclipsing of the 14,000 level in recent sessions. This surprising strength in the face of insider selling has prompted a number of you to inquire how unusual it is for the insiders collectively to be such poor market timers.
- Consider where the sell-to-buy ratio was in mid-December, which is the last time I devoted a column to the insiders’ behavior. For NYSE-listed stocks, the ratio at that time stood at 8.38-to-1. Upon reviewing the historical data, shared with me by Argus Research, I found four occasions over the last decade in which the ratio got this high or higher and the market continued rising for at least another month or two.
- Overall, however, the market fell. On average over the month following each prior occasion when the sell-to-buy ratio got this high, the broad market fell by 2.1% — as measured by the Wilshire 5000 total-return index.
- In any case, as others among you have pointed out, the high level of insider selling in December could very well have been caused in large part by the prospect of higher tax rates in 2013 — which would have prompted them to accelerate their sales. To the extent this was so, of course, the high sell-to-buy ratio at that time would have been a false signal. Regardless, the sell-to-buy ratio today is even higher than it was in mid-December, and it can’t be discounted because of the immediate prospect of higher taxes.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog