In the last week, the Dow hit an all-time high yet the ratio of the number of shares that corporate insiders sold to the number they bought almost hit 10 to 1 – the fastest pace in over a decade according to Vickers Weekly Insider Report. That must be a sign that a turn in the market is imminent, right or, at the very least, that company executives don’t feel optimistic about the economic outlook? WRONG!
So writes Louis Basenese in edited excerpts from his original article* entitled The Shocking Truth About Insider Selling.
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Basenese goes on to say in further edited excerpts:
Insider Selling – The Fallacy[It is reasonable to conclude that if anyone should better understand what is about to happen in the marketplace either specifically with their own company or with the economy in general they, the]… corporate insiders, would always know best. [The truth of the matter, though, is that] the importance put on insider selling as a result [of such a logical assumption] has no foundation in fact. It is nothing more than a Wall Street myth…Insider selling has been a terrible indicator of when this bull market is going to end.
More specifically, since 2009, every time insider selling ramps up, the mainstream financial headlines predictably urge caution but the stock market ends up charging higher and higher.
Insider Selling: The Most Unreliable Stock Market Indicator?
Consider a more comprehensive history of insider buying and selling, courtesy of Stack…
- In late 1982, as the Dow approached a level it couldn’t top in 17 previous years, insider selling hit its highest level in a decade. Did stocks fall shortly thereafter? Nope. They kept rallying for another 5 years.
- One week before the infamous 1987 market crash, insider buying – not selling – reached a record high level so they were completely caught off guard, too.
- In 1991, as stocks rallied out of the 1990 recession, insider selling spiked – indicating that the market would eventually plummet – but the bull market lasted another 8 years, without a single 10% correction along the way.
- In May 1999, insider buying hit an eight-year high right before the peak of the dot-com bubble. Again, insiders proved terrible at predicting a market turn.
Add it all up, and as Scott Wren, Senior Equity Strategist at Wells Fargo Advisors, says, “[Insiders] react to fear and greed and are just as uncertain as to what is going to happen in the future [as every other investor].” Accordingly, we shouldn’t blindly follow their lead.
Insider Selling: Lies, Damn Lies and Statistics
If you’re still not convinced that you should ignore the latest bout of insider selling, chew on this:
- According to Nejat Seyhun, a professor at the University of Michigan, insiders actually aren’t that bearish after all.
- Instead, the headline figures are being heavily skewed by “mega sales” – a large number of shares being sold by a handful of insiders…[of which the] overwhelming majority (90%) of shares sold by insiders in February were mega sales. If we [were to] subtract them out, Seyhun says the ratio of insider selling to buying is actually 10% below its average level of the past 12 months – and right in-line with the average level over the last decade.
In other words, even if you want to put your faith in insiders, there’s nothing to worry about based on their latest activity.
Don’t ever take financial headlines at face value. They seldom tell the whole (or true) story – and you definitely shouldn’t rely solely on insiders to govern your investment decisions. They’re just as unreliable.
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.wallstreetdaily.com/2013/03/19/insider-selling-myth-busting/ (© 2013 Wall Street Daily, LLC. All rights reserved)
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