Insider Buying And Selling: A Caution

In the last section of today's edition of the Casey Research Daily Dispatch, there were three different insider-transaction statistics; all of them were in bearish territory. Here they are, as copied from today's E-letter:

• An insider gauge tracked by Market Profile Theorems, a Seattle research shop, moved into bearish territory on July 31 – for the first time since November 2007.
• An insider sell-buy ratio tracked by Thomson Reuters has been hovering around bearish levels not seen for years. It recently registered a 53, meaning insiders pulled $53 out of the market for every $1 in stock they purchased.
• Another insider sell-buy ratio, tracked by Vickers Stock Research, is now “well within the bearish range,” says David Coleman, who analyzes insider activity for Vickers. It hasn’t been so high since November 2007.

The author continues:

Also consider the Barron’s “Insider Spotlight,” a weekly rundown of the top 10 insider purchases and sales. In the past two weeks, the buyers have accumulated $53.9 million in stock. Meanwhile, the sells amount to $640.2 million. That’s a historically very high ratio of 1:11.9.

Although the level of insider selling is alarming, it’s important to note that the very low levels of buying are particularly alarming. Insiders sell stock for many reasons, but they generally only buy stock for one reason: they believe the stock is going up. [The previous sentence is a paraphrase of Peter Lynch's insider-buying rule.] Despite the fact that the media is reporting an end to the recession, a bottom in housing, and a trough in earnings, we are witnessing a vote of zero confidence from the people who know these companies better than anyone else.

This market has been quite successful in fooling many people for over a year, and it has become suspiciously predicatable lately. The above stats could indicate a kicker's coming. It would kick particularly hard anyone who's expecting a replay of the 1975-6 upsurge this year and next. There were two stages to that mini-bull market, and there was only a holding pattern between them.

The lousy insider buy/sell ratios above hint at a real spoiler to the 1975-6 narrative. A downward spill would be a way of unpleasantly surprising some people, perhaps many. The only doubt I have is the same doubt engendered by any formula-based rule: they do fail from time to time.

Nevertheless, I'm in the process of shifting my actively-managed Marketocracy mock fund to more high-yielding, more ploddish companies. I've been at this for a little while, and the above item has made me glad I did.


Note: Casey Research Daily Dispatch, just to let you know, is a free newsletter from a hard-core goldbug investment service. The E-letters aren't archived, which explains why I quoted from today's so copiously.