In-The-Know Insiders Are Dumping Stocks
Opinion: Extreme bearishness among executives is a sell sign
Image Credit / Wikimedia
By Mark Hulbert, MarketWatch
Corporate insiders are more bearish than they have been in almost 25 years. That isn’t good news for the stock market, since these insiders — corporate officers and directors— know more about their companies’ prospects than the rest of us.
In fact, you may want to take their pessimism as a signal to ditch some of your stocks or shift into industries in which insiders aren’t heavily selling, such as energy, financials and basic industrials.
From China to the U.S. to the emerging markets, there is an unusually heavy amount of conflicting data this year. Where are the opportunities for investors? Joseph Tanious, of J.P. Morgan Funds Global Market Insights Strategy team, joins MoneyBeat.
Just be aware that this record bearishness isn’t evident from the insider indicator that gets widespread attention on Wall Street — the ratio of shares of company stock that insiders have recently sold versus the number they have bought.
According to the Vickers Weekly Insider Report, published by Argus Research, this sell-to-buy ratio, when applied to transactions over the previous eight weeks, is higher than average but no higher today than it was one year ago — when the S&P 500 SPX +0.62% was poised to produce an impressive double-digit gain.
And in late 2003, just as the 2002-07 bull market was gathering steam, the insiders’ sell-to-buy ratio rose to even higher levels than it is today.
But this measure is misleading, says Nejat Seyhun, a finance professor at the University of Michigan who has extensively studied insider behavior. That is because it uses a government definition of insiders that includes a group of investors whose past transactions, on average, have shown no correlation with subsequent market moves: those who own more than 5% of a company’s shares.
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