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Stock Market The Insider Selling Fallacy Exposed

Stock-Markets / Stock Market Sentiment Sep 03, 2009 - 11:58 AM GMT

By: Q1_Publishing

Stock-Markets Best Financial Markets Analysis ArticleThe market rally has been strong and the bears continue to look for anything that could signal the downturn they’ve been waiting for months on to come.

The latest “it makes sense on paper” market myth the bears have clung onto has been insider trading activity.
Insider trading is when corporate insiders like directors and executives buy or sell their own companies stock. It’s legal, regulated, and the insiders must disclose within four days of when they buy or sell their companies shares.


The basic rationale is: Insiders know their company best. They see the day-to-day operations, the sales rates, expenses, and everything else. They know their business better than anyone else because that’s what they do. So it’s a bullish sign when they buy their own company’s stock and a bearish sign when they sell out.

It makes sense and it has been attracting a lot of attention lately – not very good attention though.

Insiders Rush for Exit

The recent rally has presented many investors with the opportunity to reallocate their portfolios. Insiders have jumped at the opportunity.
TrimTabs research has found that insiders unloaded $6.1 billion worth of stock in August. That’s the highest rate of insider selling in 16 months.

More importantly, insiders haven’t been buying much either. Trimbabs also found the ratio of insider selling relative to insider buying has surged to 30-to-1. That’s the highest the ratio has hit in five years.

Charles Biderman, the CEO of Trimtabs, pointed out in the New York Times in Some Analysts See an End to Market Rally that, “You have a classic case of greed stampeding investors into believing that nirvana is at hand. We just don’t see how the market’s going to last.”

But what does massive insider selling really tell us?

The Truth About Insider Buying and Selling

We know there are plenty of stock market myths which are perpetuated over time to match whatever the market sentiment is. Insider selling might be the myth du jour.

Thankfully, insider selling has had a long track record to which we can see whether it’s something to be concerned about now.

For instance, I recently came across this Associated Press report:

Rampant Insider Selling Raises Red Flags

Major Corporate Execs, Including Some from the Homebuilding Industry Are Dumping Stocks - Serious Predictor of a Coming Crash
You’d think it was a recent headline. There’s been a recent wave of insider selling, homebuilders have been big winners, and fears of another crash are still high.

It is, however, from December 2004. That was over a year before the peak in housing. And it came at a time when the S&P 500 was at 1200 and almost three years before its recent peak at well over 1500.

In more current times, insiders haven’t been very trigger shy about pushing the selling button either. Back in June Bloomberg reported: Insiders exit at the fastest pace in two years.

Here we are two months later and the market has held up exceptionally well.

On the other side, insider buying isn’t always bullish either. For instance, corporate insiders in the retail sector recently saw a big “opportunity” to load up on company shares.

Bloomberg reported: Insider Buying of Retailers, Led by Dillard's, Climbs:

Consumer confidence is falling, the odds of a recession have risen, analysts predict the worst holiday shopping since 2002 -- and retail-industry executives are buying their companies' shares like never before.

Limited Brands Inc. Chief Executive Officer Leslie Wexner and eight other executives bought a record amount of stock last month after prices fell to a four-year low. Dillard's Inc. director Warren Stephens made the biggest insider purchase ever as shares of the Little Rock, Arkansas-based department store chain headed for the steepest decline since at least 1980.

A lot of retail executives saw opportunity, but this article is from December 2007. That was two months into the official recession. And the moves haven’t proven to be very wise since. Dillard’s (NYSE:DDS) went on to fall 75% and is still down 40 from then. The retail sector as a whole has been lagging well behind too.

Of course, these examples are just that – examples. They’re hardly enough to define a true trend.

The chart below from Sentimentrader.com shows a much better picture of the trend and the relative importance (using that terminology very loosely here) of insider buying and selling as an indicator for the overall market direction:

Investing 101: Let History Be the Judge

As you can see, insider buying and selling trends have been very volatile over the past decade. There have been plenty of times when insider buying and selling is at the right time and at the worst possible time.

This time should be no different. The wave of insider selling and lack of insider buying may be a warning sign or may simply be what it always has been - something to be aware of.

In the 100% free Prosperity Dispatch we believe in letting history be our guide when it comes to whether popular market indicators are worthwhile in guiding our decisions.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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