Insider Selling: It's Baaaack

Feb. 06, 2013 8:26 AM ETDIA, SPY12 Comments
Cam Hui, CFA profile picture
Cam Hui, CFA

Back on December 19, 2012, I wrote that investors shouldn't be overly concerned about excessive insider selling (see No need to panic over insider selling):

There are a couple of one-off reasons that could account for the flurry of insider sales:

  1. They are selling in anticipation of the end of the world, as predicted by the Mayan calendar; or

  2. They are selling in anticipation of higher capital gains taxes in 2013, especially when it appears a fiscal cliff deal is near.

Assuming that the Mayan Apocalypse doesn't happen this Friday (here is one way you hedge the end of the world), there is no need to panic just yet. Explanation #2 is a perfectly plausible reason for the rash of insider activity as 2012 draws to a close. In that case, I would wait for the insider activity data in January to see if insiders are indeed selling because of deteriorating corporate fundamentals, or for tax related reasons.

Now that we are into 2013 and any possible tax related selling is out of the way, we have an update on insider activity from Vickers - and it's bad news for the bulls. The ratio of insider sales to buys has surged from 6.67 to 1 in December, which was already at levels for bulls to be concerned, to over 9 to 1 today, according to this CNBC report [emphasis added]:

"In almost perfect coordination with an equity market that was rushing toward new all-time highs, insider sentiment has weakened sharply — falling to its lowest level since late March 2012," wrote David Coleman of the Vickers Weekly Insider report, one of the longest researchers of executive buying and selling on Wall Street. "Insiders are waving the cautionary flag in an increasingly aggressive manner."

There have been more than nine insider sales for every one buy over the past week among NYSE stocks, according to Vickers.

The Vickers data indicated a highly bearish outlook for equities:

Looking at a longer time frame paints a bearish picture as well. The eight week sell-buy ratio from Vickers stands at 5-to-1, also the most bearish since early 2012. What's more, the last time this ratio was at these levels was June 2011, just before another correction in the stock market took place.

I have been increasingly cautious, at least tactically, in the past few weeks (see Stocks cruisin' for a bruisin', More overbought warnings from BoAML and Is the whole world bullish?). This latest data point from Vickers about insider activity just serves to confirm my near-term bias.

Disclaimer: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

This article was written by

Cam Hui, CFA profile picture
Mr. Hui has been involved in the equity markets since 1980, both on the buy side and the sell side. He is a CFA Charterholder, and has presented numerous papers to quantitative discussion groups (Sample topics include: How Global are Resource Sectors).
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