Wednesday 6 February 2013

Insiders now aggressively bearish

Commentary: Insider selling pace now fastest in several years

By Mark Hulbert, MarketWatch

Reuters
Traders work on the floor of the New York Stock Exchange.
CHAPEL HILL, N.C. (MarketWatch) — Corporate insiders are aggressively selling their shares.
This is worrisome because corporate insiders — officers, directors and the largest shareholders — presumably know more about their companies’ prospects than the rest of us do. If they were confident that the shares of their companies would soon be trading markedly higher, they wouldn’t be selling them now.
Yet selling they are — at an alarming pace.
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.

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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 DJIA -0.09% 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.
As you can imagine, it’s not unprecedented. But it is more the exception than the rule.
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. Read Dec. 18 Mark Hulbert column on insider selling.
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.
All of which suggests to me that there is a distinct possibility that this time around, unlike in December, the insiders will be right.
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. Follow him on Twitter @MktwHulbert.

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