Murky Message: Insiders Dump Stocks at Record Pace

March 21, 2014

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 (^GSPC) chart below.

How did the S&P 500 (SPY) 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 (at least short-term) may be closer than expected. Here's a look at the recent pattern of high-volume down and low-volume up days and what it means (this may surprise you):

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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