Insiders Are Still Not Buying the Rally

Insider selling for the latest week spiked to $846MM while buying remained abnormally low at $14.7MM. Selling spiked almost 3 fold, but was highly impacted by $330MM in selling in CBS (CBS) by Sumner Redstone. Buying, however, fell from $32MM. Of course, it is the low level of buying that is particularly alarming. Insiders continue to exhibit an unusually low level of confidence in their own companies. As valuations spike and the jobless/revenue-less recovery continues, it’s not surprising to see insiders display a high level of skepticism in the rally that is most visible through the use of their own money.

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Comments

[untrusting ...:]

No surprise. Would expect the insider selling to continue as long as the market stays high. They all know they will be able to buy them back at much cheaper prices somewhere in the next 12 months.

Oct 26 07:24 PM

[Alan Young:]

The general point is a good one; however, this is an indicator to be used with great caution.

As to buying: consider the circumstances. Insiders who had discretionary funds for buying stock would have used them months ago, when the rally was strong. Most bulls don't have sidelined money now, even if they still want to buy. So the all-time low in buying is no surprise, and doesn't necessarily reflect "inside information."

The high sales rate is even less reliable. There can be a lot of reasons why insiders sell, which have to do with their personal circumstances, portfolio management, availability of options, etc. Some large sales are announced months in advance, and broken into bite-sized pieces. So seeing a string of sales by the same insider does NOT represent his CURRENT thinking about the stock.
Case in point: most of the sales listed on the table above are by one Philip Knight of NKE. You'd have to go back and find when he started selling and what paperwork he filed at that time, to get some context.

Oct 26 08:24 PM

[Mark Bern:]

Alan - Excellent point. It is also notable that $8.5MM of the $14.MM in purchases were in CORT by numerous directors. This one might warrant more research since there were multiple buyers all in the same period. Even in a normal week of $30MM in purchases, a number like $8.5MM in one small company by multiple directors/officers might raise some suspicion that something could be going on. But, again, we need to know why they bought and their history of purchases to get a better picture.

Oct 26 08:40 PM

[woollyB:]

Insiders do sell for many reasons, but we can be pretty confident that they are NOT selling because they think share prices are going up.

Oct 26 09:28 PM

[Econ 1:]

Guy at a bar told me once there are almost countless reasons why an insider would sell. There is only ONE reason why they buy. That said, the ratio does seem slightly unbalanced <snickers&gt; . Anyone have a reasonable guess at what is historically normal for this? If I run into dude again I'll ask him.

Oct 26 09:46 PM

[SeekingTruth:]

This info alone while concerning, is seldom enough, but when coupled with declining breadth and diminishing upside volume and increasing downside volume, it is one more big rock that the market is now being forced to carry.
Not very encouraging short term is it?

Oct 26 11:32 PM

[Jason722:]

All the points here about using insider buying/selling as the lone reason for an investment decision are correct. Especially when looking at a small period in time. However, I believe the insider buy/sell numbers have been skewed this way for months. Insiders haven't really been buying since last November/December. In that context, this indicator has a much higher correlation with future stock/market moves.

Oct 27 06:49 AM

[The Economi...:]

You all are missing the main fundemental reason for why there is insider selling, their companies are hurting.

Revenues are down all over the place significantly. The high stock price is just a bonus.

Oct 27 08:59 AM

[enigmaman:]

Not surprising for insiders to want to keep gains, while there may be many reasons for them to sell, the only thing that matters is that they have been, still are and will continue to sell. If you want to analyze why they are selling, go for it, it will not tell you anything of any value because there is no way to quantify what it is you find in your analysis.

Oct 27 08:59 AM

[La Marque:]

Insiders are not buying because their companies are either fairly valued or slightly overvalued. Those that are overvalued are seeing the sales.

Oct 27 09:41 AM

[untrusting ...:]

Jason,
A similar pattern of insider selling greatly exceeding insider buying was also evident back in 2007 and 2008, for months before the market crashed. There are several articles on this on SA which you can probably find by doing a search on SA. While there may well be multiple reasons why insiders sell, it is not a good indicator that insiders continue to sell far in excess of insider buying.

Furthermore, high levels of insider selling is just one indicator. There are many many other indicators that correlate with this and point towards the very questionable recovery rally. Some would include: 1)very small cash inflows to equity mutual funds as opposed to quite large inflows to bond mutual funds- clearly investors far prefer bonds to stocks, 2)volumes - relatively lower volumes on up days as opposed to relatively higher volumes on down days, 3) increasing number of quality fund managers commenting that stocks are overvalued - Grantham, Hussman, Kass, etc. 4) past recession metrics - past recession metrics such as PE10 ratios and others indicate stocks are quite overvalued, and probably many other measures and comparisons that one could cite that do not support the sustainability of the recovery rally. If one believes in fundamentals, then fundamentals have had very little to do with this recovery rally.

The real reasons for the majority of the recovery rally are: 1) massive Fed liquidity, 2) ultra low interest rates, 3) large dollar devaluation, 4) trading dominance by a small minority of big traders ( many reports show less than 2% of traders have accounted for as much as 50-70% of the entire trading volume). None of these conditions are sustainable and thus the odds heavily favor the rally not being sustainable either. We believe that insiders understand this and that is the real reason most of them are continuing to sell and will continue to do so until stock prices return to substantially undervalued levels..


On Oct 27 06:49 AM Jason722 wrote:

> All the points here about using insider buying/selling as the lone
> reason for an investment decision are correct. Especially when looking
> at a small period in time. However, I believe the insider buy/sell
> numbers have been skewed this way for months. Insiders haven't really
> been buying since last November/December. In that context, this indicator
> has a much higher correlation with future stock/market moves.

Oct 27 07:22 PM

[jessducky:]

Another poor Seeking Alpha article with a faulty premise based on faulty data...read the following analysis from Mark Hulbert:

ANNANDALE, Va. (MarketWatch) — Most investors expected the stock market's October correction to be much deeper and last much longer.

Not corporate insiders, however. Soon after that correction began, they markedly picked up the pace of their buying. And this trend has continued since then.

The stock market neatly obliged, by almost immediately bringing that correction to an end. The Dow Jones Industrial Average (.DJI) is now trading comfortably at a 52-week high.

Consider the ratio of insider selling to insider buying that is calculated each week by the Vickers Weekly Insider Report, published by Argus Research. In the week ending last Friday, according to the latest issue of the service, this ratio stood at 1.96-to-1. Three weeks ago, in contrast, this ratio stood at 4.52-to-1.

As David Coleman, Vickers' editor, wrote earlier this week, "Insiders ... seem to think that there is long-term value still to be found in the shares of their companies."

You might wonder why a 1.96-to-1 sell-to-buy ratio is considered to be bullish, since it means that insiders sold 1.96 shares for every one that they bought.

The answer lies in the reasons why insiders will sometimes sell their companies' shares, which not infrequently have nothing to do with their opinions of those shares' prospects — such as paying a down payment on a house, or a child's college tuition. As a result, the insiders' historical sell-to-buy ratio has averaged between 2-to-1 and 2.5-to-1, according to Vickers.

In relation to that historical average, therefore, the current 1.96-to-1 ratio is slightly below average — and to that extent bullish.

Furthermore, according to research conducted by University of Michigan finance professor Nejat Seyhun, the average sell-to-buy ratio in recent years has been closer to 6.5-to-1. This can be traced in large part to the increasing share of insider compensation that has come from equity grants from their companies.

Since the insiders did not acquire these shares by purchasing them, they will never show up in the sell-to-buy ratio. But insider sales of those shares most definitely will show up, skewing that ratio towards increasingly negative readings.

In light of Seyhun's findings, of course, the current sell-to-buy ratio of 1.96-to-1 is even more bullish.

Regardless, Vickers is most definitely not using the recent positive trend of insider behavior to throw caution to the winds. Its two model portfolios on average currently have a healthy 50% cash position, in fact.

This also is consistent with the recommended equity exposure of the other insider-oriented newsletter monitored by the Hulbert Financial Digest: Jonathan Moreland's Insider Insights.

The bottom line for those inclined to follow the lead of the insiders: Don't give up on this rally yet.

Nov 17 08:35 PM