Insider Selling Begins To Pick Up
No one has a better vantage point of a company's current state of business than insiders. While not a perfect indicator of where a stock will go, a lot of attention is given to insider transactions of buying and selling shares.
A pair of data providers who track insider transactions are both beginning to show insiders are increasingly beginning to sell shares in their companies as the market has made a remarkable rebound from the March lows.
According to data from the Washington Service, executives and officers are selling stock compared to buying stock so far this month at a ratio of 5-to-1. The current ratio of insider sales to buys has been exceeded only twice over the last three decades. The ratio of just 0.27 is the lowest since 2000 and well below the 11-year high of 1.75 reached in March.
"I think insiders broadly thought the March sell-off was over-pessimistic," Raymond James analyst Tavis McCourt said. "As the market's recovered, we've just seen more selling, less buying, as prices have become less dislocated."
This marks a stark turnaround from March when data from the Washington Service showed the ratio of companies with insider buying compared to insider selling hit 1.75, marking the highest level of insider buying since March 2009.
InsiderInsights.com noted a similar trend. Over the past month, the number of companies with insider selling outnumbered the number of companies with insider buying by 186%. Jonathan Moreland, the Director of Research at InsiderInsights.com, noted that short term market tops have tended to coincide with the ratio approaching 200%.
"Our indicator is now flashing a warning sign," Moreland said. "I'm not prepared to say everybody should sell everything and short the market because of the recent insider data."
Breaking down insider transactions by sector shows insiders in the sectors that have performed the best are selling the most, while those that have lagged as the market has rebounded are buying.
According to Raymond James, financials saw the highest percentage of insider buys in June at nearly 16%. Materials, real estate, utilities and energy are the only other sectors that saw a positive percentage of insider buys. On the other hand, technology, industrials, consumer discretionary and healthcare saw the most insider selling last month.
"I think more insiders in the financials sector view their stocks as undervalued compared to other sectors," McCourt said. "Whether they are right or not, we’ll see."
While a stock's price isn't dependent on what insiders are doing, it's worth pointing out that the level of insider selling has picked up, especially in contrast to what they were doing at the depths of the market's low just a few months ago.
With insiders now bailing on their stocks and many well-known investors still hesitant to buy into the market's rebound, it's increasingly looking likely if the insiders are correct that retail traders who are rushing into the stock market will be the ones stuck holding the bag.
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