What Does Massive Insider Selling Really Tell Us?

Insiders are dumping shares at record pace.

So is it time to sell?

After all, no one knows a company better than insiders. They see the day-to-day operations, the sales figures, expenses, and everything else. They know their business better than anyone else. Their business is what they do every day.

So it makes sense to track when insiders are buying and selling their own shares. Buying is bullish and selling is bearish, right?

Well, it may be. But if we take a look at history, it’s not as clear cut as many analysts make it out to be. More importantly, the insiders are teaching us one very important lesson that will go a long way to making you a more successful investor.

Insiders Rush for the Exits

The recent rally has presented many investors the opportunity to take some money out of the markets. Insiders have jumped at the opportunity.

TrimTabs research has found that insiders unloaded $6.1 billion worth of stock in August. That’s the highest rate of insider selling in 16 months.

More importantly, insiders haven’t been buying much either. Trimbabs also found the ratio of insider selling relative to insider buying has surged to 30-to-1. That’s the highest the ratio has hit in five years.

Charles Biderman, the CEO of Trimtabs, pointed out in the New York Times that, “You have a classic case of greed stampeding investors into believing that nirvana is at hand. We just don’t see how the market’s going to last.”

But what does massive insider selling really tell us?

The Truth About Insider Buying and Selling

We know there are plenty of stock market myths which are perpetuated over time to match whatever the market sentiment is. Insider selling might be the myth du jour.

Thankfully, insider selling has had a long track record - which we can check to see whether it’s something to be concerned about now.

For instance, I recently came across this Associated Press report:

Rampant Insider Selling Raises Red Flags

Major Corporate Execs, Including Some from the Homebuilding Industry Are Dumping Stocks - Serious Predictor of a Coming Crash

You’d think it was a recent headline. There’s been a recent wave of insider selling, homebuilders have been big winners, and fears of another crash are still high.

It is, however, from December 2004. That was over a year before the peak in housing. And it came at a time when the S&P 500 was at 1200 and almost three years before its recent peak at well over 1500.

In more current times, insiders haven’t been very trigger shy about pushing the selling button either. Back in June Bloomberg reported: Insiders exit at the fastest pace in two years.

Here we are two months later and the market has held up exceptionally well.

On the other side, insider buying isn’t always bullish either. For instance, corporate insiders in the retail sector recently saw a big “opportunity” to load up on company shares.

Bloomberg reported: Insider Buying of Retailers, Led by Dillard’s, Climbs:

Consumer confidence is falling, the odds of a recession have risen, analysts predict the worst holiday shopping since 2002 — and retail-industry executives are buying their companies’ shares like never before.

Limited Brands Inc. (LTD) Chief Executive Officer Leslie Wexner and eight other executives bought a record amount of stock last month after prices fell to a four-year low. Dillard’s Inc. director Warren Stephens made the biggest insider purchase ever as shares of the Little Rock, Arkansas-based department store chain headed for the steepest decline since at least 1980.

A lot of retail executives saw opportunity, but this article is from December 2007. That was two months into the official recession. And the moves haven’t proven to be very wise since. Dillard’s (NYSE:DDS) went on to fall 75% and is still down 40 from then. The retail sector as a whole has been lagging well behind too.

Of course, these examples are just that – examples. They’re hardly enough to define a true trend.

The chart below from Sentimentrader.com shows a much better picture of the trend and the relative importance (using that terminology very loosely here) of insider buying and selling as an indicator for the overall market direction:

Investing 101: Let History Be the Judge

As you can see, insider buying and selling trends have been very volatile over the past decade. There have been plenty of times when insider buying and selling is at the right time and at the worst possible time.

This time should be no different. The wave of insider selling and lack of insider buying may be a warning sign. It may simply be what it always has been: something to be aware of. Or it may be even more proof that the majority of company insiders are just like the majority of investors, really bad.

There is one thing we can learn from company insiders though…

Did Enron Teach Us Nothing?

..that’s to stay diversified.

When company insiders buy their own stock, have the majority of their 401ks tied up in company stock, and have their jobs, insurance, and salaries tied to one company, they are not well-diversified.

This is what those tens of thousands of Enron employees went through. Most of them had bet big on their own company. No one was complaining when Enron’s shares nearly tripled in two years, the company was printing stock options and shares for employee 401ks, and salaries were rising.

Most everyone in the company was highly leveraged…and loving it. Eventually, as all investors do eventually learn, the ups and downs are only more severe when you’re not diversified. Most folks with families and bills just aren’t prepared for the risks.

So I think the same way when I hear about how corporate insiders are selling out in droves. It’s more likely most just relearned the value of diversification the hard way. Now they are trying to salvage what they can.

You know my take on the markets since April: don’t bet against it until it starts going down. So right now is not likely a good time to sell out, but if you’re sitting on a few big winners, it could a good time to get more diversified.

Comments

[Mad Hedge F...:]

yyn The dinosaurs of the market, like myself, are collectively being struck by the similarity of the current stock market and that of September 1987, just before the one day, 25% plunge in the Dow. That was when I tied to buy stock with the index down 300 from a payphone in Paris, only to have the trader at Morgan Stanley burst into tears and smash the phone down on the desk (remember that David G.?). My new guru is Gluskin Sheff’s strategist David Rosenberg, who says that stocks have already discounted two years of recovery and now carry a lot of risk. It is priced for 40% EPS growth and a “V” shaped recovery, which we have zero chance of getting. GDP this year will come in at negative 2.5%, and will claw back a listless 1-2% rate in 2010. Stocks are discounting a 4% GDP growth, compared to only 2% for bonds, so he’d much rather own those. With a deflation rate of minus 2% and high yield returns of 12%, junk now offers a 14% inflation adjusted yield, not bad. The secular 25 year bull market in credit expansion is over. Rent still accounts for a third of the CPI, and they are falling for the first time in 17 years. Sure, we’ll see ephemeral sugar highs like those for cash-for-clunkers and the tax credit for first time home buyers. But at best, it will only add up to a series of small “W”’s, or what I refer to the as the “square root” shaped recovery. With the price of everything stretched, you better start reeling in some of that risk.

Sep 14 11:28 AM

[Larry House:]

For the average investor, insider activity is not a factor. No long-term portfolio should be adjusted because of it. Do you think Buffett moves money around based on insider activity? It is a clue, however. Insiders have profited nicely from the recent runup, and they may want to lock in some profits as well. Fact is, some profits can certainly be booked here, but that doesn't mean one should sell all stocks.

Sep 14 11:32 AM

[Tony Petroski:]

The Mad Man is back. Please, more stories about you in Paris. Wasn't that the young Sarkozy I saw you with? Nobody can drop names like the Madman. Although, truth be told, he dropped none in his missive.

The title of the article: "What Does Massive Insider Selling really tell Us?"

Massive action of any kind tells us stuff.

Am I to read this correctly? All is lost, buy gold?

Sep 14 11:34 AM

[thechaser:]

MadHedgeFund-

i think you said it well; kinda like panic down, panic up; da boyz did their aug 14-17 rug pull and their sep 2-3 rug pull;

is there another rug pull before Q3 earnings? anybody have any thoughts on that?

today, it was flat and then today's chosen bellwethers took off as if on cue at 0953, did their standard plateau

why?

Sep 14 11:47 AM

[Graham and ...:]

Warren Buffett seeks to buy the stocks of companies whose managers think like owners. Though there are no guarantees, "his" companies tend to have larger insider ownership and less insider selling than most.

JP Morgan more cynically said, "In the long run, stock returns to its rightful owners." What he meant was that insiders sold at the top, so they could buy MORE shares at the bottom, thereby concentrating power and wealth.

Sep 14 11:48 AM

[Joseph L. S...:]

One take on insider trading is that insiders are back to even in the companies they know best and are now diversifying into other industries, thus keeping the market afloat.

My own view is not so sanguine. I believe these insiders were stunned by the speed and amplitude of the decline, feared they would end up like the Enron employees, are back to even, and are exiting while they can and paying down debt rather than putting the money right back in the market. For the nation, that’s a good thing. For the markets? Everyone comments, but no one really knows for sure…

Sep 14 11:49 AM

[I need more...:]

Insiders are selling because they know the economy sucks, the consumer is dead and buried, and business expansion and revenue increases are gone. You know, the things that used to matter to "investors" who bought shares of companies they had thoroughly investigated and believed would grow over time.
This thing we today call a stock market is a rigged casino, propped up with hydrogen, on thin volume, PPT and government money liquidity, and is doomed to crash. When, who knows, but any half-intelligent insider wants no part of it, and got out while the getting was good.
So keep writing articles just like things are normal, whistling past the graveyard, la di da.

Sep 14 12:01 PM

[Nick36:]

Looking at that chart above, current insider selling seems to be a lot more persistent than at any time before.

Previous insider selling happened in relatively short spikes followed by insider buying. And now insider selling has gone up and is staying up for months. Which is very unusual, when you look at the whole chart.

It's hard to say what this persistent insider selling means. Because there is no historical example to compare it too. Perhaps a bigger chart that goes back all the way to 1920s might provide some examples of insider selling similar to the present one.

I suspect that in the early 1930s insiders were selling like crazy for a long time, similar to what's happening now. But I have no idea where to get this kind of historical information or whether it even exists.

Sep 14 01:22 PM

[BullnBear:]

Insider selling is being discounted in the mainstream financial media as well as various internet boards at a pace that defies logic.

Be careful when you discount those behind the scenes of companies in favor of those on the sidelines cheering on a non-fundamental based rally in what can only be described as a shaky worldwide economy at best.

Just ask yourself if anyone currently giving you advice happened to warn you about anything that has taken place over the last year and then you may find that self reliance is the best method of all.

Sep 14 02:20 PM

[Mayascribe:]

I'm not sure why this is getting missed, but it is. Insiders selling may be due to how Obama is going to soon increase cap gains taxes.

Besides, if I were captaining a huge company and had loads of shrares, I would be unloading some, too, to buy that multi-million dollar beach front home for about a 40% discount.

Sep 14 03:24 PM

[LT Trader:]

Like any single stock market "indicator", has a mixed bag of results. I would never hang my hat on one indicator. Everything always works when backtested - the catch is always what is going to happen moving forward.

As another example with data above, the extreme two points were reasonable sell/buy points (made around 500 S&P points on the short and 100+ on the long) - but who would know these were the extremes until after the fact?

Sep 14 04:20 PM

[Tomcat101:]

Is it possible that the smart insiders are simply taking some off the table after the huge rally and going into Sept./Oct. where we normally get a pullback?

Sep 14 04:42 PM

[TheSnail:]

Great idea. Let's raise taxes to pay back the debt created by Reagan and Bush.

Then it will be up to the kiddie's to pay for the current mess due to Dubba (runner's left on base, to use a baseball term).

As always, negative feedback from narrow minded 'publicans who can't think long-term (don't raise my taxes or I'll have a hairy fit) is always appreciated.

Sep 14 04:59 PM

[untrusting ...:]

Nick,
Interestingly, saw an article, a few years ago, about Joseph Kenndy and the financial titans back in the 30's. A personal aide to Kennedy claimed that Kennedy was warned several days before the market crash began to get out of the market and apparently as the story claimed Kennedy, Morgan, and many other insiders did. If I remember it correctly, Kennedy's net worth at the time was supposedly about $2million. Within a few years, when the rest of the world was trashed, Kennedy and the other titans had substantially increased their net worths and of course purchased many stocks back for pennies on the dollar. Assuming the article was basically true, which we did no further verification on, it just shows that some things just never seem to change all that much.



On Sep 14 01:22 PM Nick36 wrote:

> Looking at that chart above, current insider selling seems to be
> a lot more persistent than at any time before.
>
> Previous insider selling happened in relatively short spikes followed
> by insider buying. And now insider selling has gone up and is staying
> up for months. Which is very unusual, when you look at the whole
> chart.
>
> It's hard to say what this persistent insider selling means. Because
> there is no historical example to compare it too. Perhaps a bigger
> chart that goes back all the way to 1920s might provide some examples
> of insider selling similar to the present one.
>
> I suspect that in the early 1930s insiders were selling like crazy
> for a long time, similar to what's happening now. But I have no idea
> where to get this kind of historical information or whether it even
> exists.

Sep 15 12:13 AM

[buoy:]

Chaulk some of it up to volatility.

Sep 15 09:20 AM