Insider Selling Raises Red Flags About Investing

More often than not, corporate insiders know far more about the health of the economy than the average investor. Presumably, it’s because they have access to high level sales numbers, customer sentiment, inventory levels, and a whole host of information that is not easy to come by. When confidence abounds, business is doing well, and customers are satisfied, insiders buy. When things are looking bleak, insiders sell. So what are insiders doing right now? They’re selling. Big time.

According to Charles Biderman, CEO of TrimTabs, an independent research firm, the average insider selling ratio, that is, number of sellers divided by the number of buyers, is around 7. That means there are typically 7 times more sellers than buyers on any given day. There are a number of reasons the number is so high, one being that many employees are paid in stock, and sell immediately when the stock vests, but that’s not really all that important.

What is important is that the average is 7, and that in November of 2008, before the panic sell-off, the number had spiked to 24. What’s even more important is that right now, that number is 30. Insiders are selling off more than they did just two months after Lehman Brothers collapsed. We were still looking into the abyss at that point.

Even though I am bearish on the overall economy for the next few quarters, I was shocked to see such a high ratio of insider selling. It’s probably time to start taking profits off the table and moving towards a more conservative portfolio, with a large swath in cash.

Comments

[enigmaman:]

insider buying/selling ratio is usually a good barometer to look at when trying to determine should I Buy, Sell or Hold a particular stock but as it relates to the bigger overall market though I see it somewhat differently, while some insiders are selling purely because its company fundamentals are not looking to good most I believe are selling because they have little faith in the over all health of our economy, they seem to be preparing for harder times by cashing out. That this persistent and escalating insider selling is not being discussed during prime time tells me something is up, I mean its big news so why isnt it being discussed more, Why?

Sep 10 06:30 AM

[NUCLEAR1929:]

when insiders are selling, nothing will save the market

Sep 10 11:00 AM

[Donald Ingram:]

The ratio of insider selling to buying is outrageous, and has been this way since March. The 'rats' are deserting a sinking ship. This market is all smoke and mirrors with no substance, as high speed trading programs chase 5 cents here or there, with outfits like AIG,Citi, Fannie & Freddie making up the lions share of volume on most days. Don't get sucked in - those who do, start unbuttoning your shirts because you're going to lose them!

Sep 10 01:51 PM

[untrusting ...:]

The big question is who is buying all this stock? Because it sure isn't the retail investor. Looks like mutual funds, pension funds, and hedge funds will be left holding the bag once again .. which ultimately means the average american will take yet another big hit on their retirement investments.

Sep 11 04:37 AM

[Ryan Freund:]

Untrusting -- I'm not sure why you say its not the retailers. I think it is most certainly the retailers (along with the others you mentioned). What evidence leads you to believe retailers are abstaining?

Sep 18 07:10 PM