INSIDER CONSENSUS: The In-The-Knows Selling Stocks…Lot’s of It

March 24, 2014

A common indicator that is followed is the level of buying and selling of stocks by insiders. There are a wide variety of definitions for the term insiders, so for simplicity let’s just say they represent people who are at the Executive level within publicly traded companies and own a material amount of stock in their company. Insiders have a very unique and front row perspective of their businesses (obviously) but also a very real-time perspective of the business climate, especially with how their clients and suppliers are functioning. If they are putting more of their own money to buy stocks or selling a significant amount of stock they already owned, it could foreshadow some kind of positive or negative behavior in stocks.

So what are the insiders up to these days? Well they appear to be bailing out of stocks and big-time. According to Nejat Seyhun, a finance professor at the University of Michigan who has extensively studied insider behavior says that insider selling, “is as pessimistic as I’ve ever seen over the last 25 years.” According to his analysis, corporate officers and directors in recent weeks have sold an average of six shares of their company’s stock for every one that they bought. That is more than double the average adjusted ratio since 1990, which is when Seyhun’s data begin. A year ago insider sentiment was solidly on positive side.

According to Nejat, “There have been two prior occasions when the adjusted insider ratio got almost as bearish as it is today — early 2007 and early 2011. The first came a half a year before the beginning of the worst bear market since the 1930s. While the market didn’t fall as much following the second of these two instances, the May-October decline in 2011 did satisfy — based on intraday levels of the S&P 500 index — the semi-official definition of a bear market as a 20% drop.”

The stewards of capital don’t like what they see out there and are voting with their wallets. That can’t be a good thing. It might be worth a look to revisit some positions that have been rewarding. At the same time, if a meaningful pullback ensues, some high quality companies may be on sale, it also could be worth making a list of companies that could potentially be picked up on the cheap.