Pace of Insider Sales Continues to Escalate

At Ockham, we continue to be interested in insider trading activity as an indicator of sentiment. Of course, we understand that insiders do not know what the future holds more presciently than the rest of us, but we think it is safe to assume that there are few investors more knowledgeable about any particular stock. The trend in insider trading activity suggests that corporate managers believe that their company’s stocks are getting out ahead of themselves.

We have noted the fact that insiders have become increasingly bearish over the last few months, and each time the extent to which the sellers have outnumbered the buyers continues to rise. Today, a press release from TrimTabs Investment Research shows that insiders are selling at a pace not yet seen; insider selling is 30.6x greater than insider buying! This is the highest ratio on record since TrimTabs began tracking this data in 2004. Furthermore, their data reveals that insiders have sold a record $105.2 billion worth of stock in just the last four months.

Thus far, the bearishness of insiders over the last four months has led to some missed gains thanks to the continued rally. However, instead of regaining their faith in this market, insiders are digging in their heels on the bearish side of trades. Readers can come to their own conclusions about the implications of such a strong and defined trend, but the CEO of TrimTabs certainly has an opinion.

“The best-informed market participants are sending a clear signal that the party on Wall Street is going to end soon…

Investors who think the U.S. economy is recovering are going to get a big shock this fall. Companies and corporate insiders are signaling that the economy is in much worse shape than conventional wisdom believes.”– Charles Biderman CEO of TrimTabs Investment Research

Original post

Comments

[willynill:]

Look it up in Barron's today. Go to "Data and Tools", then to "Index PEs and Yields". The PE for the S & P 500 index is 130.24. The earnings number is $7.90. Yes, the market is overpriced.


On Aug 29 02:21 PM Foosie wrote:

> And, Nick, you did say 143.95 P/E?
>
> As of 6/30/09 S&P was 23x earnings according to S&P. Factoring
> in last four quarters, S&P P/E is 15.25 times reported earnings.

Aug 29 07:47 PM

[David Zanoni:]

Although I can't speak for every insider that is selling - it is most likely due to them diversifying their overall portfolios since many of them are compensated with company stock. I don't think we'll have a steep sell-off in the stock market, just a mild pullback with some leveling off.

Aug 29 08:20 PM

[cowboy4u:]

with the real unemployment at around 20% and property taxes shrinking nationwide and back to school sales probably going to tank how much longer can this rally go on? Also more homes are going into forclosure and people saving instead of spending how can our economy recover? Maybe in 10 years...the market s earnings are much lower than before and are built on layoffs and shady accounting..hope all of the "small" investors don't get burned again.....,,Good Luck to all..

Aug 29 10:19 PM

[demarvin:]

Eventually.whatever that means,the present market trend must break and follow a continuous direction.Without job creation and I mean real jobs that people work at,producing something,ship it and get paid for it,there will be no real economy,only government jobs,producing nothing and burning taxpayer cash.Then,there is only one path for the market and that is down,down and down.
The promised retraining of the unemployed for "green" jobs" is mythology to quiet the crowd.Government cannot and has never created real jobs,only those related to the "dole". Small businesses are the job creators,and the current administration is hell bent on destroying them. As Obama continues to pay off his friends and the unions,the rest of the country goes to hell and he could care less because he no longer needs their votes.Stick around,it is going to get very interesting,and sooner than later.

Aug 29 11:32 PM

[one eye:]

Sell off?, you had your sell off. It happened on Friday, Next week will be another move to the Upside. The first 4 Trading days of any given month are biased to the Upside, New Cash moving into Mutual Funds.

But, hey, do it your way. All of those Insiders selling, market Has to go Down, meanwhile, I'll be looking to Buy the Shares of a Dry Bulk Carrier, TBSI, Insiders are Buying here as well.

Aug 30 06:04 AM

[yellowhoard:]

I thought the Baltic dry index was trending down.

Aug 30 06:11 AM

[User 464671:]

For all you know this "stupid" company may be purchasing gold with its profits and only uses the cash for short term liquidity. Although deflation of the US dollar for domestic use is a realistic possibility for the short trm, inflation of US dollar against foreign goods and foreign currencies seems almost certain both short and long term. Short term equals next few years.

On Aug 29 09:52 AM americanincanada wrote:

> There is an ad on TV in which somebody called Gordon Liddy disses
> paper money. Worthless. Not like gold. He represents a company that
> is so stupid it will trade its valuable appreciating hard gold asset
> for my worthless, devaluing, trash paper money. Can you imagine that?

Aug 30 07:42 AM

[Zenilvana:]

When a boom time goes on, everybody saw nothing but greed. At the time of the system collapsed miserably, a sudden up-turn makes some insiders uneasy. They can be fear-stricked only to sell the free lunches But the hungry crowds who lost a lot wastes no time to recoup the previous glory. Let them sell. The better time is sure to come. And very soon. But we do not realize it as ever gloomy investors. History repeated many many time likewise.

Aug 30 07:45 AM

[H.J. Huneycutt:]

Too much of a deal is being made over insider selling. I wouldn't worry about it except on a company-to-company basis.

The issues with relying on insider selling to gauge sentiment:

(1) Insiders are subject to the exact same irrational behavior as all other investors

(2) The author notes that this is the highest insider selling has ever been since it's been measured. That's important because if you note --- insider selling is now higher than it was in October 2007. Yet, I don't think anyone in their right mind would claim that the market is more overbought now than it was back then.

(3) One reason insider selling is so high is because the market downturn. Insiders weren't as eager to cash in their shares back in November or March. Now that prices have become more reasonable, the tendency to delay selling has ended.

If I see a high amount of insider selling at a company and there are other issues present, then I think it might be wise to take notice. Otherwise, I think it's silly to try to use insider selling as a gauge of where the market is heading.

Aug 30 10:00 AM

[Danny Furman:]

I'd be very interested to see a chart showing the insider buy/sell ratio versus the S&P since 04, or whenever the insider numbers were first recorded.
Any help, technical wizards?

Aug 30 10:11 AM

[wuileng:]

Using the P/E of the S&P as a form of valuation of the overall market at this stage in the economic cycle is trivial.

When earnings are very very low (i.e. after a recession), the P/E ratio asymptotes. Besides, since the earnings are calculated on a trailing 12 month basis, we have had two quarters of zero or possibly negative earnings. Besides, in the early stages of a recovery, this is not unusual.

Now, if you were to tell me that the P/E ratio of the S&P was 20 in a later stage of economic expansion, I'd actually be worried.

With that being said, I agree that the market does not truly reflect the current state of the economy and a small correction is indeed overdue. I believe a double dip recession is a distinct possibility. But retesting the March lows? Nahh. There's no more shock value; circumstances have changed.

Aug 30 10:44 AM

[Swashbuckler:]

Foosie--Nick provided the S&P link in his post. READ IT.


On Aug 29 01:51 PM Foosie wrote:

> And, Nick, you did say 143.95 P/E?
>
> To answer you: This is the earnings of the S&P500 not the P/E
> ratio. You need to divide the S&P500 number on any given day
> by these earnings.

Aug 30 11:17 AM

[Mayascribe:]

Swash: Check out my last "scariest" post. I know you're smart enough to put 2+2 together.

Aug 30 12:19 PM

[karchad:]

On Aug 29 01:17 AM HERO1957 wrote:

> This is scary

You can read such statistics at ANY time during a bull market. This is why the average investor does terribly. At the speculative top, you will read zillions of statistics as to why the market will continue to rise.
Here, with the market still 30% below all-time highs, you will still read articles telling you to sell, trying to scare you.
When the Dow hits 14000, you will start to see the internet filled with "why this time is different" articles, urging you to BUY BUY BUY.
Financial literature always tells you to buy high, sell low. The true investor sees through this nonsense.

Aug 30 12:41 PM

[Smartinvest...:]

But for what reasons are they selling. There's nothing wrong with selling into strength. Remember that a lot of wealthy people lost money in real estate and stocks, some have had to sell off art, extra homes and whatnot but if they need to raise cash to make up for losses somewhere else then that might be a reason why they are selling.

I've always thought this was a sucker's rally anyway. Many business have done a stellar job at making the right cuts to meet/beat the streets expectations (which were quite low) but how much more cost-cutting can go on? If creating wealth in the stock market were as easy as setting our expectations low enough we'd all be millionaires by now. Q3/Q4 earnings will really give us insight as to the sustainability of this rally and our economy. But more important than earnings is consumer data (after all our economy is 2/3 consumer spending) such as, personal bankruptcy filings, foreclosure proceedings (which are on moratorium in some counties), unemployment rate, and default rates on Credit Cards.

Aug 30 12:47 PM

[Swashbuckler:]

Regards to Kotter.


On Aug 30 12:19 PM Mayascribe wrote:

> Swash: Check out my last "scariest" post. I know you're smart enough
> to put 2+2 together.

Aug 30 12:50 PM

[convertbond:]

There will definitely be a correction. I've been bearish for a couple weeks. I used to trade distressed debt at Lehman Brothers. This market is going to roll any day now.

Aug 30 02:13 PM

[No Free Cake:]

If you want to see the S&P 500 spreadsheet of earnings and multiples see the following link:

www2.standardandpoors....

Pick and choose trailing, forward, as reported or operating earnings and your preferred historical multiple and decide for yourself.

For me, I see about $60 of 12m forward operating earnings at worst. Using a typical 16.5 multiple for S&P gives a value of 990. Doesn't seem horribly overpriced to me at Friday's 1029 but, hey, different strokes ...

Aug 30 08:42 PM

[one eye:]

Things aren't looking Good for my Contrarian Position, Unless the Market moves up in the last hour, I'll have to eat Crow.

But Gold is up, which is good.

Sep 01 03:23 PM

[TSK:]

To all those debating if S&P PE is 150 or 10, you need to look at the real numbers for yourself and make sure you understand what those numbers mean.

If you look at trailing twelve months for PE, then yes the number is around 130-150 due to gigantic losses at the end of last year. However this is essentially irrelevant unless you believe there will be similar losses in the coming months, which seems highly unlikely. If you look at the last two quarters earnings have been fairly reasonable and probably point to a PE closer to 20. S&P estimates something in the low 20's using forward looking estimates based on current earnings, which may be slightly higher than normal but not outrageous.

Just make sure you understand what you're reading or you'll make stupid mistakes and decisions based on meaningless numbers.

Sep 11 05:55 PM