Commentary: What do insiders know that outsiders do not?
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Bad news, stock-market bulls: Corporate insiders are selling their companies' shares at an abnormally fast pace.
In fact, one measure of that selling activity shows insiders of NYSE- and AMEX-listed companies recently were selling at the fastest rate since data began being collected in the early 1970s, four decades ago.
On the theory that insiders know more about their companies' prospects than do the rest of us, this is an ominous sign.
Corporate insiders, of course, are a company's officers, directors and largest shareholders. They are required to file a report with the Securities and Exchange Commission more or less immediately upon buying or selling shares of their companies, and the SEC makes those reports public.
One firm that gathers and analyzes the data is Argus Research, which publishes its findings in the Vickers Weekly Insider Report. One indicator that the firm calculates is a ratio of the number of shares that insiders have sold in the open market to the number that they have purchased.
In the week ending last Friday, according to the latest issue of the Vickers report, this sell-to-buy ratio stood at 6.43 to 1. This is higher than 95% of other weeks' readings over the last decade.
That's ominous enough, but consider last week's sell-to-buy ratio for just those issues listed on the NYSE or AMEX. That came in at 13.10 to 1, which is the highest reading for this ratio since when Vickers began collecting the data, which was October 1974.
Is there any way for a bull to wriggle out from underneath the weight of these high readings? Perhaps, though it's not easy.
One counterargument bulls can make is that it's entirely normal for insiders to sell when the market rallies, and therefore such selling does not carry particularly bearish significance.
But the stock market hasn't exactly been rallying all that strongly. To be sure, the latest sell-to-buy ratio reflects last week, not the current one, and that week did have a better tone than the current one — but not all that great a tone.
In any case, the other occasions in recent years in which the sell-to-buy ratio rose to close to the same level it is today were on the heels of more or less uninterrupted rallies over the previous two or three months. That's not the case now, of course, suggesting that insider selling this time around may not be so benign.
Another bullish counterargument is that the volume of insider transactions last week was light, as it usually is during earnings season. That's because insiders are either reticent to buy or sell their companies' shares in the days and weeks before their companies report earnings, for fear of being charged with acting improperly.
But I'm not sure how much weight to put on this argument. There still were several hundred firms with insider activity last week, and it's unclear why earnings season would have discouraged just those insiders who otherwise were interested in buying.
Furthermore, it's worth remembering that the extensive Vickers database encompasses many other earnings seasons besides the current one. Also, the latest insider sell-to-buy ratio is higher than almost all comparable readings from those prior seasons.
Perhaps the strongest counterargument the bulls can muster at this point is that the insiders are not infallible. That indeed is true. Still, researchers report that they have been more right than wrong.
At a minimum, I think we can all agree it can't be good news that insiders recently have been selling at such a fast pace.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.