Traders work on the floor of the New York Stock Exchange
Any time corporate executives and directors are heavily selling their company's stock there's reason for concern. And lately they've been doing just that.
The last time insider selling was as high as it is now was in the period from late 2006 to late 2007. It was right after that insider-selling surge that the stock market began its long painful decline, says Charles Biderman, CEO of TrimTabs, an independent institutional research firm.
Biderman believes that insider trades shoot higher when there's a disconnect between broad market opinions and what business executives feel in their gut. "When [insiders think] things are going better than most people think, they buy stock," he says. "When things are going worse than people think, they sell."
That's to say, insiders have no crystal ball but they often have access to up-to-the-minute sales data as well as firsthand impressions from their sales managers — and that gives them an inside track on what's happening in the economy. When this special access leads them to be big sellers of their stock, well, it's a vote of no confidence in their employer's near-term future.
Biderman has measured the ratio of insider selling to buying since 2004, and says historically the ratio is 7 to 1. (Insiders almost always sell more than they buy because they receive stock as part of their compensation.) Right now the ratio is 30, one of the highest he's recorded. November 2007 is the last time the ratio even came close, at 24.
The big rise in insider selling, which developed over the past several weeks, signals a time for caution, not panic, says Jonathan Moreland, analyst at InsiderInsights, a stock-market advisory service. "The insiders are telling me, O.K., there's a yellow light now; the green light is off," he says. In response, Moreland is advising his clients to raise the cash component of their investment portfolios.
Moreland sees other market data flashing the same yellow light. "The uncertainty in [analysts'] forward-looking earnings estimates, and I've thought this all year, has been a reason to stay cautious in this market," he says, adding that he began raising cash two weeks ago in anticipation of a market decline. "It seems to me there's another phase we have to go through [in the financial crisis] and that has a huge amount of uncertainty surrounding it," he says.
Kevin Conway, product manager for insider and ownership data at Thomson Reuters, agrees the abnormally high number of insider stock sales in recent weeks indicates change, but says it may not be cause for alarm. Insiders, he says, could simply be selling to lock in gains that will lessen their realized losses from the past two years.
"They've lost a lot and I think they're just trying to get some back," Conway says, adding it could also be a sign that insiders don't think the market will continue to rally the way it has recently. "It's a good time for anybody who's taken a little bit of a hit in the last two years, even insiders. They're seeing an opportunity here where the market has given them some positive returns and they're going to take advantage of that."
Let's hope that's all it is.