|I began tracking the shares insider sold and planned to sell versus purchases in June. It has been an interesting exercise. Initial ratios were 60 shares sold for every share purchased. That dropped somewhat in July but began to rise again in August. While the ratio looks relatively low in Figure 1, First Call announced that insider selling in August reached the highest levels since they began tracking the statistic in 1990 with $44 dollars of shares sold by insiders for every dollar purchased. According to figures from the Wall Street Journal Insider Spotlight, they averaged 60 to 1.|
|Figure 1 – Ratio of insider shares sold and planned share sales to those purchased from June to mid-October 2003. The ratio soared to 416 to 1 in the second week of September followed by a drop in the S&P500 from a high of 1040 on September 18 down to 995 by September 30.|
|Exactly one week after it was reported that the ratio had jumped to 416 to 1 in the Journal, the S&P 500 dropped more than 4%. It dropped on September 19th to 122:1 and back to a more reasonable 45:1 shares sold to those purchased in the first week of October but it appears that they are on the rise again. For the week ending October 10, the ratio more than doubled again to 101:1. |
There are very few truly reliable leading indicators available to technicians but this one has the potential of fulfilling this need. A number of technical and fundamental analysts believe that what actions insiders take sets a good example for investors and traders to follow. Like any indicator, it must be metered carefully to see that it lives up to expectation before it is used to any significant degree in making buying and selling decisions.
But it begs the question, if insiders are selling stock in their companies like never before, why should anyone else be buying those shares from them? Like the popular game of musical chairs, those left holding them when the music stops, lose.
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