This week's sentiment report highlighted company insiders and the fact that they have stepped up their selling. Some may question the wisdom of following company insiders. After all, they were buying at the October, 2007 top and have been selling for the past 8 months.

Figure 1 is a weekly chart of the S&P500 with the InsiderScore "entire market" value in the lower panel, and here we focus on the 2007 topping process. Insiders were buying to an extreme degree and I have highlighted those extremes with the vertical bars. One would expect that company insiders are buying with a longer term perspective as opposed to flipping after the next peak in prices. So this bullishness at the time of the October, 2007 top suggests that those at the controls of their companies didn't even see the troubles ahead.

Figure 1. InsiderScore/ October, 2007

Nonetheless, here we have an article by Mark Hulbert from the NY Times: "More Often Than Not, the Insiders Get It Right". Hulbert does acknowledge the 2007 gaff by the insiders, but he comes to the conclusion that they are worth following. He quotes H. Nejat Seyhun, a finance professor at the University of Michigan, who has studied the actions of corporate insiders since the 1970's. The good professor suggests that company insiders are not infallible, but they likely to know when their own company's stock is undervalued.

Hulbert also quotes from the current Vickers Weekly Insiders Report where the sell to buy ratio had fallen back to 3.52 to 1. In November, 2009, the ratio was 5.21 to 1 and back in March, 2009 at the bottom it was 0.45 to 1, which was the lowest value since 1990.

Also I want to mention this article seen recently over at Pragmatic Capitalist blog: "Insider Selling Soars to 2010 High".

Lastly, I should also mention that InsiderScore provides a market score to assess insider trading. This score just isn't a reflection of a company insider sell to buy ratio. InsiderScore's market score has some qualitative components to it such that they are assessing what type of insider is buying (i.e., CEO v. junior v.p.), their past track record with regards to timeliness, and the amount of buys or sells relative to past transactions. Unfortunately, their data only goes back to 2004, but as we have seen as well, it is not infallible. Nonetheless, I do like the qualitative aspect to it.

My take on insider selling: Insider selling is useful, but like any indicator or data point it can go through periods where it just doesn't get it right. I would rather bet with the "smart money" and figure out when they are wrong, then ignore their actions altogether. This is why I use multiple inputs or points of light to illuminate to my market analysis.

Get a daily dose of market sentiment. Subscribe to our Premium Content! Improve your market timing.

By Guy Lerner

http://thetechnicaltakedotcom.blogspot.com/

Guy M. Lerner, MD is the founder of ARL Advisers, LLC and managing partner of ARL Investment Partners, L.P. Dr. Lerner utilizes a research driven approach to determine those factors which lead to sustainable moves in the markets. He has developed many proprietary tools and trading models in his quest to outperform. Over the past four years, Lerner has shared his innovative approach with the readers of RealMoney.com and TheStreet.com as a featured columnist. He has been a regular guest on the Money Man Radio Show, DEX-TV, routinely published in the some of the most widely-read financial publications and has been a marquee speaker at financial seminars around the world.

© 2010 Copyright Guy Lerner - 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.

Guy Lerner Archive

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.