Insider Sales Figures Tell A Troubling Tale

09/15/03 10:38:22 AM

by Matt Blackman

The ratio of insider sales to purchases remained relatively steady in May and June. They started to creep up in August. In early September they went ballistic. What does it mean?

Security: N/A
Position: N/A

Insiders sold more than $44 of stock for every dollar they purchased in August, according to a report from Thomson Financial. Insider research analyst, Kevin Schwenger said in a recent Wall Street Journal article that this represents the most bearish reading since comprehensive records began in 1990. Insider analysts have been advising clients to hedge their bets since May. According to the most recent Commitment of Traders (COT) figures for commercial traders, it appears that the professionals, at least, are listening (see "Clue Hunting Through Commitment of Traders' Data").

Figure 1 � Chart showing the ratio of insider current and planned stock sales to purchases. Data provided by the Wall Street Journal.

I began tracking the ratio of announced and planned sales against shares purchased in May (Figure 1). May and June figures were high at an average sixty shares sold or planned to be sold to every share purchased. However the jump by more than three times to 192 for the week ending September 5 shows that insiders are using the recent market rally to trade share certificates for cash like never before. It will be interesting to see how this compares to the record set in August by the end of September. Technology stocks have been by far the most popular industry group for insider sales.

Michael Painchaud, research director for Market Profile Theorems, tracks four indexes of investor sentiment and all are positive. His indexes for individuals, portfolio managers, newsletter writers and traders all agree and this uniformity tends to precede market downturns, he said in the article.

Insider sales are just one data grouping used by professionals to gauge market sentiment and should not be used in isolation to make market decisions. But many traders will be watching this trend carefully through September. If insiders are dumping shares at such an unprecedented rate, why should anyone else be buying them, especially considering the unrealistic valuations that many corporate equities now enjoy?

Suggested Reading:

Blackman, Matt [2003], "How High Can a Bumblebee Fly?" June 17

Blackman, Matt [2003], "Clue Hunting Through Commitment of Traders' Data," August 28

Cooke, Tony [2003], "Insider Sales Swamp Purchases In Face of Stock Market's Advance, " Wall Street Journal, September 10

Wall Street Journal, "Insider Spotlight," [2003], May 13

Wall Street Journal, "Insider Spotlight," [2003] May 23

Wall Street Journal, "Insider Spotlight," [2003] June 6

Wall Street Journal, "Insider Spotlight," [2003] June 20

Wall Street Journal, "Insider Spotlight," [2003] July 18

Wall Street Journal, "Insider Spotlight," [2003] August 8

Wall Street Journal, "Insider Spotlight," [2003] September 5

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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