Sunday, April 26, 2009

Insider Selling Quite Strong

There have been many proponents of this latest market rally. Calls of "the worst is over" and the "decline is slowing" have helped boost a market that, going back six weeks ago, was pretty oversold. Now we're not oversold. Some buyers are returning to the market. There has been a lot of talk that much of the big money, or the funds haven't been all in on this rally. If that were to happen, that would be a major tailwind for stocks.

But there still are the fundamentals (who knew, right?). Earnings have done okay relative to expectations (which were pretty low). But there are companies performing well, and they will continue to do so. I haven't participated in buying things with impaired fundamentals just because they were the ones hit the hardest. Things like financials, home builders, and REITs.

What I want to show you is a chart of insider transactions as of late.

The chart speaks for itself. Insider selling is typically a sign that insiders feel stocks are going to fall. This isn't always the case, but when it is this pronounced, you can usually count on it. one detractor from this thesis would be that insiders were planning to sell a certain amount of shares, but waited until stocks rallied so they wouldn't sell at depressed prices. Although insider selling or buying isn't a great indicator on its own, it can be a valuable tool.
So the questions needs to be asked: If the market is so strong, and the rally will continue, then why is there so much insider selling???


Shadox said...

Correct me if I am wrong, but the chart shows a recent decline in the ratio - and according to the caption the ratio is currently in the neutral range. Is that not so?

Shadox said...

Also... reading the chart it seems like since September the ratio was supposedly in... bullish territory? This indicator has clearly not worked as you present it for the past several months.

Michael said...

Yes, there is a recent decline in the ratio, but it went from approx. 40:1 to about 20:1. This is a ratio of sales to buys. Both numbers are significant. If you look at the past year, when the chart didn't move much, the ratio was still above zero. The point here is that this data isn't significant UNTIL IT SPIKES one way or the other (like it did in April). You'll also note that I said this data isn't a significant indicator on its own, but can be useful. Its useful when combined with other market data, such as overbought/oversold indicators, etc.